According to ING's Carsten Brzeski, the European Central Bank (ECB) is anticipated to raise interest rates by 25 basis points next week, describing the move as an 'insurance' or dovish hike intended to strengthen the central bank's credibility and preempt potential indirect effects from the ongoing energy price shock [1]. Brzeski highlights that while the Eurozone has shown resilience, inflation remains primarily driven by elevated energy prices, which limits the justification for further monetary tightening beyond the upcoming hike [1].
Brzeski notes that headline inflation continues to edge higher and is expected to remain above 3% year-on-year for the rest of the year, despite core and services inflation measures not indicating immediate concern [1]. He points out that with oil prices staying high and the risk of a new gas price shock increasing, most ECB policymakers may still see a clear rationale for another rate hike [1].
However, Brzeski warns that additional hikes beyond the expected 25bp increase could harm the Eurozone economy and risk triggering a recession, especially since the deposit rate would reach 2.5%, which is within the ECB's own definition of a neutral rate [1]. He concludes that further tightening would signal a shift toward restrictive monetary policy, which may not be warranted given the current inflation drivers [1].
CONCLUSION
ING expects the ECB to implement a 25bp 'insurance' rate hike next week, primarily in response to persistent energy-driven inflation. However, the scope for further tightening appears limited, as additional hikes could threaten Eurozone economic stability and risk recession. The market takeaway is that the ECB is likely to remain cautious after this move.