ECB Rate Hike Likely Today, But Markets Eye Tone of Guidance

The European Central Bank is set to raise its deposit rate by 25 basis points today, but markets are focused on the tone of the accompanying guidance rather than the decision itself.

According to ING, a 25 basis point hike is expected in every scenario it considers, with the bank's current baseline read that inflation risks are tilted to the upside due to higher energy prices and possible second round effects.

ING has laid out four possible outcomes built around inflation, growth, and the tone of interest rate guidance. In its most dovish scenario, the ECB would signal a prolonged pause and flag concerns about the bond market, while in the hawkish scenario, policymakers would point to clear hints of a further hike in October and potentially beyond.

The euro and Bund yield currently sit close to ING's neutral scenario, which sees inflation risks rising again but growth risk as more balanced. With markets already leaning toward the view that today's hike will come with a firmer tone rather than a dovish one, there is scope for a larger reaction if the ECB's guidance ultimately lands closer to either extreme of ING's range.