ECB's Rate Hike Surprise Raises Questions About Future Monetary Policy

The European Central Bank (ECB) surprised markets by leaving the door open to an October rate hike, despite already pricing in another two rate hikes beyond September.

Markets were expecting a more dovish stance from President Christine Lagarde, but she instead stated that inflation would be 'longer lasting' than previously expected.

One possibility is that the inflation shock is delayed, with food inflation and energy-sensitive parts of the basket still proving benign despite high energy prices.

Another argument is that businesses are underestimating their own pricing power again, as seen in the past when 'realised price growth' outpaced 'expected price growth' in business surveys.