Sticky services inflation has changed our call; we now expect the ECB to stay on hold until December.
We are changing our ECB view. In March we expected a first cut in June; that is no longer our base case. Services inflation has stalled at an uncomfortable level, and the latest wage data surprised to the upside. Several Governing Council members have said publicly that they are in no hurry.
We now expect the ECB to keep rates unchanged through the summer and autumn, with a first cut in December at the earliest. The risk is that cuts slip into next year.
Positioning: we close our short-dated Bund longs and move to neutral duration. A stronger euro is now more likely, as the market had priced cuts that will not come soon.
Key risk to this view: a sharp slowdown in growth that forces the ECB’s hand earlier.