Summary
UBS Global Research sees the European Central Bank holding its key rate at 2% at the April 30 policy meeting, citing officials' remarks and recent geopolitical news that have given policymakers additional time to assess developments. While UBS keeps its baseline of two 25 basis point hikes in June and September and a pause in July - a sequence that would take the rate to 2.5% - the bank stresses that risks to that outlook persist and that it is premature to rule out other scenarios.
Policy backdrop and UBS forecast
UBS reiterated its core forecast that the ECB will raise interest rates by 25 basis points in both June and September, separated by a pause in July, which would bring the central bank's benchmark rate to 2.5%. The bank said the April Governing Council meeting offers an opportunity for policymakers to compare newly available data and shifting geopolitical factors against the ECB's March macroeconomic projections and alternative scenarios.
Change in tone from Frankfurt
UBS attributed a recent softening in market expectations to comments by ECB President Christine Lagarde and board member Isabel Schnabel, which the research team said "alleviated concerns" that the ECB might act sooner or with greater force than previously anticipated. Those statements contrasted with press reports issued immediately after the March meeting that had suggested the possibility of an April rate increase.
How market pricing has moved
Rate markets responded to the evolving picture. Before the outbreak of hostilities in the Middle East, market pricing implied roughly 10 basis points of ECB rate cuts during 2026. By late March, that had flipped to more than 80 basis points of hikes being priced in. After public remarks from Lagarde and Schnabel, expectations pulled back to approximately 55 basis points, and then declined further to about 43 basis points following reports that Iran may no longer be obstructing the Strait of Hormuz.
Geopolitical developments and implications
UBS noted that if the reports on the Strait of Hormuz are confirmed and prove to be lasting, the resulting reduction in energy price pressures could give the ECB additional latitude to delay tightening. At the same time, the bank warned that it would be premature to conclude that any rate hikes are completely off the table, reflecting ongoing uncertainty around both economic data and geopolitical developments.
Outlook and calibration
In recent weeks UBS said it had observed forecast risks that skewed toward an earlier, faster, and larger hiking cycle, including the possibility of moves in April and June, or in June and July. The recent official commentary from ECB leaders has, in UBS's assessment, raised the threshold for an April move and diminished the likelihood of a more aggressive sequence than its baseline scenario assumes. Nonetheless, UBS maintains its June and September hike profile as its central view while acknowledging a range of potential outcomes.
Note: This report summarizes UBS Global Research interpretations of ECB commentary and market pricing dynamics. It reflects the information and market moves described by UBS and highlights the continued interplay between geopolitical developments and central bank policy deliberations.