ING’s Michiel Tukker expects the European Central Bank (ECB) to keep the deposit rate at 2.25% at the upcoming meeting, with a September hike seen as likely as Oil prices rise and markets already price in around 23bp. Tukker highlights well-anchored long-term inflation expectations near target and notes that markets are positioned for almost three hikes over the next year.

ECB seen on hold before September

"The ECB should keep the policy rate at 2.25%, but we do see a September hike as likely, especially as oil prices are moving higher again. One could argue for a front-loaded hike today, but over previous years the ECB has always fully telegraphed any policy moves in advance. And with no hikes priced in by markets, deviating from this strategy seems unlikely"

"With longer-term inflation expectations still well-anchored, the ECB can hold rates steady for now. The 10Y inflation swap rose on the back of higher oil prices, but at 2.2% is still close to target. Over the past months, the central bank has communicated a hawkish stance and avoided the word “transitory” at all costs."

"Not enough inflation data is available to argue in favour of more near-term tightening. And given markets are already positioned very hawkish, we don’t see much room to stretch that further. As such, the upside risk to rates seems limited."

"As a result, markets are now positioned for almost three hikes over the next year. While we think this looks stretched, taking a dovish position would quickly be wiped out by more oil volatility. As such, we don’t suggest pushing against current pricing."

"We cannot fully discount the tail risk of an early 25bp hike. The question is whether markets would interpret this as a hawkish policy turn or whether the move would be perceived as front-loading September’s move. We think the latter."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)