Eurozone Interest Rates Headed for Restrictive Path

Financial markets are bracing for a more hawkish European Central Bank as geopolitical tensions threaten to prolong energy-related inflation.

The ECB is widely expected to raise its deposit rate to 2.5% in September, and investors are now betting that the rate could approach 3% by late 2027, with markets assigning a growing probability to further rate increases after the expected hike.

A 25% probability of the ECB deposit rate reaching 3% by March 2027 and around a 60% probability by September 2027 are being priced in by investors, reflecting concerns that the inflation impact of conflicts could extend beyond higher crude oil prices.