Markets Expect More ECB Rate Hikes Than Economists Predict
Financial markets are pricing in additional European Central Bank (ECB) rate hikes beyond September, despite most economists expecting the central bank to cap rates at 2.50% and maintain them through 2027. The divergence stems from differing views on how inflation caused by the Iran conflict will evolve. Markets fear that rising energy costs could lead to broader price pressures, while many economists see it as a temporary supply-side shock. Eurozone inflation rose to 3.3% in August, driven largely by surging energy prices (up to 14.3%). Core inflation remained stable at 2.4%. The ECB is concerned about second-round effects where higher living costs could trigger wage demands and further price increases. ING suggests a September rate hike may be an 'insurance' move to preserve the ECB's credibility. The uncertainty around energy prices, combined with resilient economic growth in the eurozone, supports market expectations of more tightening. This reflects concerns that delaying action might allow inflationary pressures to become entrenched.
