Rabobank's Senior Macro Strategist Bas van Geffen anticipates that the European Central Bank (ECB) will raise its deposit rate by 25 basis points to 2.50% at its upcoming meeting next week, followed by an extended period of holding rates at that level [1]. Despite this forecast, market participants are pricing in a more aggressive path, with expectations of a terminal rate reaching 3.00% [1]. The OIS curve currently reflects an 85% probability that the ECB will hike once more before the end of the year, and a 15-20% chance that the pace of hikes could accelerate in October [1].
The recent uptick in energy prices has reinforced the rationale for another rate hike, and Rabobank expects the ECB to maintain vigilance regarding inflation risks [1]. However, the strategist suggests that President Lagarde will likely adopt a restrained tone, keeping all policy options open without making strong pre-commitments, which could be interpreted by markets as dovish [1]. Rabobank notes that the ECB would probably not mind this perception, given current market pricing [1].
Risks remain skewed to the upside, particularly if inflation broadens beyond energy and economic growth remains resilient [1]. Rabobank highlights that the ECB demonstrated limited tolerance for inflation risk in June, and would not hesitate to hike again if inflation expectations accelerate or if price pressures spread [1].
Overall, the market is focused on the ECB's policy trajectory after September, with traders pricing in the possibility of further tightening if inflation risks intensify [1].
CONCLUSION
Rabobank expects the ECB to hike rates by 25bp next week and then hold, but market pricing suggests a risk of further hikes if inflation persists. The ECB is likely to maintain a cautious, flexible stance, with upside risks to policy tightening. Market participants should remain alert to inflation developments and ECB communications for future rate decisions.