Daily Europe

24 July 2026, 04:30 UTC Chief Investment Office GWM Investment Research

ECB’s hawkish hold leaves bond opportunities intact UBS House View - Daily Europe Mark Haefele, Global Wealth Management Chief Investment Officer, UBS Switzerland AG Dean Turner, Economist, UBS AG, UBS AG London Branch Frederick Mellors, Strategist, UBS Switzerland AG Alison Parums, Strategist, UBS Switzerland AG Themis Themistocleous, Head Chief Investment Office EMEA, UBS AG London Branch Kurt Reiman, Head of Fixed Income, Americas, UBS Financial Services Inc. (UBS FS)

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Thought of the day The European Central Bank left the deposit rate unchanged at 2.25% at its July meeting, a widely anticipated decision after June’s 25-basis-point increase. The overall message from both the statement and press conference was that of a hawkish hold, with policymakers expressing concern about the inflationary consequences of higher energy prices. The re-escalation in the US-Iran conflict has pushed European natural gas futures to a four-month high, while Brent crude oil prices hit USD 100/bbl for the first time in two months.

With energy prices rising again, ECB policymakers appear to have moved away from the more balanced risk assessment discussed at the Sintra forum and back toward a framework of upside risks to inflation and downside risks to economic growth.

We continue to expect the ECB to raise policy rates by 25bps in September. But we believe current market pricing for a series of rate hikes appears somewhat aggressive:

The ECB is taking a meeting-by-meeting approach. President Christine Lagarde stressed that uncertainty remains exceptionally high and that the Governing Council needs more evidence on how the energy shock will feed through to broader inflation before taking further action. The ECB offered no explicit forward guidance and repeated its meeting-by-meeting approach.

Lagarde noted that underlying price growth has stayed “contained.” Headline inflation has delivered encouraging news, with second-quarter readings coming in slightly weaker than the ECB’s staff projections. Core inflation is less benign, with services inflation running above 3%, but it remains broadly in line with the ECB’s staff projections made in June. Inflation expectations also remain anchored. We believe a September move is firmly

This report has been prepared by UBS Switzerland AG, UBS AG London Branch, UBS Financial Services Inc. (UBS FS). Please see important disclaimers and disclosures at the end of the document.

on the table, but the case for a longer sequence of hikes still depends on clearer evidence of second-round inflation effects.

Policymakers are likely to remain mindful of economic growth risks. Second-quarter survey data suggest Eurozone economic activity held up reasonably well. But the ECB’s statement noted “forward-looking indicators suggest that economic growth will remain modest in the near term.” We forecast fairly muted GDP growth of 0.8% this year and 1.2% in 2027.

So, we continue to expect limited further policy tightening from here, and believe current futures market pricing—which implies the deposit rate rising toward 3% over the next 12 months—looks too hawkish. We continue to expect bond yields to fall over the next 12 months and see value in EUR fixed income amid elevated starting yields, supportive technicals, and resilient fundamentals. We favor medium tenors and believe investors can selectively extend into longer maturities (out to 10 years) with government bonds from Germany, the Netherlands, and Austria. In credit, selectivity remains important with spreads near cyclical tights, but A/BBB rated bonds in short to intermediate maturities still offer attractive carry with manageable spread- duration risk.

We see Eurozone stocks as Attractive and expect a broadening rally in 2H26. Limited further tightening is unlikely to derail equity markets, in…