Deutsche Bank economists expect the European Central Bank (ECB) to keep its deposit rate steady at 2% at the current meeting, despite markets fully pricing in a rate hike for June. This expectation is driven by Europe's significant exposure to the ongoing energy shock, which has introduced considerable uncertainty regarding oil prices and the potential pass-through to inflation. As a result, the ECB is anticipated to retain a hawkish stance, emphasizing a meeting-by-meeting approach to future policy decisions while gathering more information before committing to a hike in June [1].
Market data reflects this uncertainty and hawkish sentiment. The 1-year Euro inflation swap increased by 23.3 basis points, reaching a three-year high of 3.87%. Additionally, markets are now pricing in 83 basis points of ECB rate hikes by the December meeting, an increase of 10.9 basis points on the day. This shift in expectations has pushed yields higher across Europe, with the 10-year German bund yield rising by 4.3 basis points to close at a new post-2011 high of 3.11% [1].
Deutsche Bank's analysis suggests that the ECB will not rush into a rate hike decision due to the prevailing uncertainty around energy prices and their impact on inflation. Instead, the central bank is likely to maintain flexibility and keep its options open, signaling to markets that future moves will depend on incoming data [1].
CONCLUSION
The ECB is expected to keep rates unchanged for now, but markets are anticipating a hike in June due to energy-related inflation risks. Elevated inflation swaps and bund yields indicate heightened market sensitivity to ECB signals, underscoring the central bank's cautious yet hawkish approach.