Commerzbank economists report that market participants are now pricing in a more proactive stance from the European Central Bank (ECB), with €STR forwards discounting at least one 25 basis point rate hike by July and nearly two hikes by the end of the year, despite rising growth risks [1]. This shift reflects expectations that the ECB will prioritize defending its inflation credibility, even if it means sacrificing economic growth [1]. Since the beginning of the war, 2-year Schatz yields have increased by 45 basis points, indicating heightened market anticipation for tighter monetary policy [1].
In contrast, the Federal Reserve's policy trajectory appears less aggressive. Fed Funds and Overnight Index Swap (OIS) curves have only reduced rate-cut expectations, and are not pricing in any rate hikes [1]. Notably, 2-year U.S. Treasury yields are now trading above both the effective Fed Funds rate and the Fed's interest on reserve balances (IORB) for the first time since 2023 [1].
Commerzbank notes that upcoming central bank meetings—including those of the Fed, ECB, Bank of England (BoE), and Bank of Japan (BoJ)—as well as the EU leaders' summit, will be closely watched for their economic implications and policy responses [1]. Despite market pricing, Commerzbank economists are skeptical that a majority within the ECB's governing council will support a near-term rate hike, suggesting the ECB is unlikely to commit to a specific rate direction at this time. However, staff projection scenarios may enable ECB President Christine Lagarde to deliver strong messaging [1].
CONCLUSION
Markets are pricing in a more proactive ECB stance with potential rate hikes, while the Fed remains less aggressive, only paring back rate-cut expectations. Despite these market signals, Commerzbank expects internal ECB debate and does not foresee a clear commitment to rate hikes in the near term. The upcoming central bank meetings will be pivotal for further policy clarity.