ECB to Hike Rates, then Hold at 2.50% for Extended Period

Rabobank's Senior Macro Strategist Bas van Geffen believes that the European Central Bank (ECB) will increase its deposit rate by 25 basis points to 2.50% next week, and then hold at that level for an extended period.

Markets are currently pricing a more adverse path with a terminal rate of 3.00%, but van Geffen stresses that there are upside risks if inflation broadens and growth remains resilient.

The recent increase in energy prices supports the case for another rate hike, and the ECB will likely remain vigilant while maintaining its 'measured pace' of tightening.

Van Geffen notes that policymakers have limited tolerance for inflation risk, so if there are signs of accelerating inflation or if it starts to spread beyond energy prices, the ECB will not hesitate to hike again.