ECB Watch: Investors Bet on Harsher Policy Amid Ongoing Geopolitical Tensions
Investors are bracing for potential further tightening from the European Central Bank (ECB) as ongoing geopolitical tensions and energy market risks continue to fuel inflationary pressures. The ECB's key deposit rate is expected to rise to 2.5% in September, following a June increase, and markets are increasingly pricing in the likelihood of additional moves toward monetary tightening.
Oil prices above $90 per barrel, tight fuel markets, and depleted gas storage are forcing investors to reassess their expectations for ECB policy. Market participants are concerned about potential shortages of refined petroleum products and low gas inventories in the eurozone, which could prolong conflicts and sustain price increases.
The situation is complex, with several factors contributing to inflation risks. Expansionary fiscal policy, investment in the green transition, increased defense spending, and labor shortages are all driving up costs, while business activity in August grew at its fastest pace since the start of the year, reducing the need for a quick shift toward looser policy.
Capital Economics noted that gas inventories were last close to this level in 2021, when prices exceeded €170. Current levels are around €65. Investors believe the war could affect the energy market for an extended period and sustain price increases.