Energy Prices Drive Market Expectations for ECB Rate Hikes

The European Central Bank (ECB) has been monitoring the impact of energy prices on inflation and growth, as they continue to rise above baseline projections. In an interview with Reuters, ECB Vice-President Boris Vujčić stated that energy prices have become a focal point for market expectations regarding inflation, interest rates, and the terminal rate.

Vujčić emphasized that the ECB does not provide forward guidance and acts on a meeting-by-meeting basis. However, he noted that markets are pricing in several rate hikes over the next 12 months, which may be driven by high sensitivity to energy prices.

Gas storage levels in Europe are relatively low heading into winter, posing a risk of a natural gas shock compared to oil price fluctuations. Vujčić highlighted that both oil and gas affect inflation differently, with oil having a more immediate pass-through and gas having a more persistent impact.