ECB Hawks Eye More Rate Hikes Amid Stubborn Inflation
European Central Bank (ECB) policymakers are leaning towards further monetary tightening, according to people familiar with private conversations. They suggest that firm policy may be needed due to inflation remaining above 3%, and market expectations of three more rate hikes could be too optimistic.
The likelihood of an October increase has risen to 70% from around 50% earlier, with traders now factoring in three quarter-point steps by the end of 2027. Germany's two-year yield has increased to 3.21%, its highest reading since 2023.
Economists are forecasting higher borrowing costs, with Bloomberg Economics' David Powell and Simona Delle Chiaie stating that the deposit rate may need to reach at least 2.75%. Jefferies' Modupe Adegbembo still prefers a December hike but acknowledges October as possible if energy prices remain high.
Market participants are adjusting their expectations, with the euro rising against the dollar and investors fully pricing in three more quarter-point hikes by year-end.