Commerzbank analysts have highlighted that recent dovish comments from key European Central Bank (ECB) officials have led to only modest near-term rate increases being priced in by the market, with forwards currently reflecting just a 4 basis point rise by the end of the month, 22 basis points by June, and 52 basis points by December [1]. Despite this, the market is still pricing in more than two rate hikes for 2026, which Commerzbank believes may be an overestimation given current economic conditions and ECB projections [1].
The analysts argue that there is scope for ECB forwards to price out some of the anticipated tightening, especially since energy prices and scenario assumptions do not clearly justify additional hikes compared to the ECB’s adverse projections [1]. They note that the recent shift from bullish to bearish steepening in the yield curve has coincided with a recovery in oil prices, but not to levels that would necessitate further rate hikes [1].
Commerzbank also points out a clarification regarding ECB President Lagarde’s statements: while she initially indicated that the ECB’s scenarios did not factor in monetary policy measures, the official transcript later corrected this, stating that the adverse scenario assumes the rate path from the baseline scenario [1]. Currently, Euribor forwards remain above those from the cut-off date of 11 March, and energy futures are lower than the adverse scenario assumptions [1].
Looking ahead, with the next ECB meeting still seven weeks away, Commerzbank suggests that unless there is a significant escalation in the energy crisis that pushes oil prices sustainably above $100, the likelihood of the ECB hiking rates as much as the market currently predicts is low [1].
CONCLUSION
Commerzbank sees the market as overpricing the likelihood of further ECB rate hikes, given current economic data and official ECB projections. Unless there is a major shock, such as a sustained surge in oil prices, the analysts expect fewer hikes than currently priced in by forwards.