UBS is forecasting a 25 basis point increase in the European Central Bank's policy rate to 2.25% at the June 11 meeting, a step it regards as broadly consistent with current market pricing. The bank warned, though, that the bigger risk for investors lies in the potential for additional rate increases later in the year.
Signals from ECB President Christine Lagarde at the April 30 policy meeting, together with subsequent comments from Governing Council members Isabel Schnabel and Philip Lane, make the June tightening effectively a foregone conclusion in UBS's view.
UBS ruled out a more aggressive 50 basis point move, arguing that "current inflation dynamics seem less dramatic than in 2022/23 and the risk of pro-inflationary second-round effects appears a lot smaller." That assessment underpins the bank's expectation that the ECB will not feel compelled to raise rates very aggressively. "As a result, we think the ECB will not see a reason to push up rates very aggressively," economists led by Reinhard Cluse wrote.
Where UBS places greater emphasis is on the path after June. Press reports based on ECB sources have suggested the bank may need to hike "at least twice" this year, a characterization that implicitly leaves open the possibility of three moves. Markets already appear to be pricing some additional tightening, with roughly 56 basis points of cumulative tightening implied by December 2026.
UBS acknowledged the upside risk to its own projection of two 25 basis point hikes. "Accordingly, we acknowledge upside risk to our call for just two hikes of 25bps and will be watching carefully for any signs on 11 June that the ECB might deliver its second hike already on 23 July and not wait until 10 September as our baseline would imply," the economists said. A recent report citing ECB sources described a June hike as "is nearly sealed, but July is fully open."
Turning to the ECB's updated macroeconomic projections, UBS expects the bank to trim its 2026 GDP growth forecast by 0.2 percentage points to 0.7% while lifting its 2026 inflation forecast by 0.3 percentage points to 2.9%. UBS attributes the higher inflation projection primarily to stronger energy prices.
Those revisions would mark a deterioration relative to the March baseline, although UBS notes they would not be as severe as the ECB's own adverse scenario from that meeting.
Economists at UBS identified several data points the ECB is likely to scrutinize closely as it judges whether to tighten further. Inflation expectations and wage indicators are singled out as early signals of potential second-round effects. Separately, any evidence of a sharp slowdown in Eurozone growth - including weaker employment readings - would also be intensively monitored.
The ECB, UBS said, maintains a data-dependent stance on the timing of any additional action. The bank has an open mind on whether a July move would replace or supplement a currently signaled September hike; the eventual decision will depend on incoming economic data.
Bottom line: UBS views a 25 basis point rise on June 11 as very likely but warns that markets may be underestimating the probability of further tightening before year-end. Key risks to watch for the ECB include wage-driven inflation dynamics, shifts in inflation expectations, energy price developments, and signs of weakening growth or employment.