ECB Set for Dovish Rate Hike Amid Energy-Driven Inflation

ING's Carsten Brzeski expects the European Central Bank (ECB) to raise interest rates by 25 basis points next week, describing it as a 'dovish hike' or an 'insurance rate hike'. The move is seen as a response to energy-driven inflation in the Eurozone.

The ECB's decision is driven by high oil prices and the risk of another gas price shock. Brzeski notes that while headline inflation remains above 3% year-over-year, core and services inflation are not causing concern. This suggests that further rate hikes could harm the economy and lead to recession.

ING believes there's limited scope for additional tightening beyond next week's expected hike. The deposit rate would still be within the ECB's neutral range at 2.5% after one more increase. Brzeski emphasizes that another rate hike is necessary 'to strengthen its credibility and to preempt any possible indirect or even second-round effects from the current energy price shock'.