ECB Prepares 25bp Dovish Hike as Energy-Driven Inflation Takes Center Stage

Market analysts at ING expect the European Central Bank (ECB) to raise interest rates by 25 basis points next week, bringing the deposit rate to 2.5%. This move is seen as a 'dovish hike', meant to act as insurance against persistent price pressures without pushing the Eurozone economy into a severe recession.

The ECB's decision comes as heady inflation remains above 3% year-on-year for the rest of the year, largely driven by energy prices. Brent crude oil is trading around $78 per barrel, and European natural gas futures are near €38 per megawatt-hour. ING argues that core inflation remains relatively stable, making further tightening beyond next week highly unlikely.

The impending rate hike is expected to be a cautious move by the ECB to maintain its credibility without exacerbating economic damage. The move will also signal the end of the tightening cycle, limiting the Euro's upward momentum against the US dollar.