ECB Prepares for Hawkish Stance as Inflation Fears Grow

The European Central Bank (ECB) is preparing for an increasingly hawkish stance to combat inflation, according to traders and analysts. They predict that geopolitical tensions will continue to drive up prices, making it necessary for the ECB to raise interest rates to almost 3% by late 2027.

Money markets are already pricing in a rate hike in September, which would take the deposit rate to 2.5%. However, bets on additional tightening are gaining momentum, with a roughly 25% chance of reaching 3% by March 2027 and an about 60% chance by September.

The main drivers of inflation concerns include elevated oil prices, trading at over $90 a barrel, as well as the risk of tighter supplies of refined fuels and thin euro zone gas inventories. Analysts warn that these factors could lead to a prolonged conflict that would keep price pressures high.

Experts also point out that the war in Ukraine has damaged infrastructure related to oil refining, which will further impact prices. Additionally, expansionary fiscal policy, green-transition investment, defence spending, and persistent labour market tightness are reversing some of the disinflationary forces seen before the pandemic.