Rates spark energy in the driving seat

Key arguments

• Energy prices remain in the driving seat, not the ECB; the ECB hike was a 'no-brainer' and largely priced in
• Lagarde gave no concrete guidance, noting the outlook is highly uncertain with upside inflation and downside growth risks
• The EUR front-end fully discounts three more ECB hikes by mid-2027, implying a deposit rate of at least 3.25%
• Going beyond that pricing would require hikes at meetings without new projections or moves larger than 25bp
• ECB sources suggested October is in play, though December may still be more appropriate
• ING economists see a hawkish aftertaste: the ECB's projections forecast inflation above target for too long
• Pricing looks stretched, but with the US long-end untethered and geopolitical tensions pointing to higher energy prices, it is hard to stand in the way
• Anything above a 0.2% month-on-month core CPI should tip the Fed balance further towards a hike

Corresponding source evidence

1. Over to the Fed to see if it can tame it.
2. Of course, the longer view that the market now still broadly contemplates is one where the ECB keeps rates on hold at 3.25% from mid-year, and that landing level might well be questioned next if energy markets do not calm.
3. Our economists point out that the ECB's new set of projections forecasts inflation above target for too long, and that, based on the assumption of one or two more hikes, leaves a hawkish aftertaste.