ECB Traders Bet on Almost 3% Deposit Rate by Late 2027 Amid Geopolitical Tensions

Traders are bracing for a more aggressive European Central Bank (ECB) as geopolitical tensions weigh on inflation and fuel price pressures. According to Reuters, money markets expect the ECB to raise rates in September, following a tightening in June, with bets on additional hikes gaining momentum.

The ECB's deposit rate is expected to reach 2.5% by the end of September, with some analysts predicting it could hit almost 3% by late 2027. Markets price a roughly 25% chance of the deposit rate reaching 3% by March 2027 and about 60% by September.

Analysts say that while oil prices have retreated from their peak of $120 in April, traders remain worried about inflation and the ECB's reaction. MUFG senior economist Henry Cook notes that a durable Middle East peace deal remains achievable before the US midterm elections in November, but warns that if it seems out of reach, energy pricing could move closer to the ECB's adverse scenario.

Euro area inflation is driven by natural gas market dynamics, with storage levels at their lowest for this time of year in over a decade. Capital Economics says the last time inventories were close to this level was in 2021, when prices reached a peak of over €170.