ING economists Carsten Brzeski and Bert Colijn expect the European Central Bank (ECB) to deliver a single ‘insurance’ rate hike in June, largely because markets have already tightened financial conditions and inflation pressures are creeping higher. They argue that muted fiscal support and a non-overheating Eurozone economy reduce the need for multiple hikes, while policymakers remain wary of repeating 2011’s policy mistake.

Single hike as policy insurance signal

"With this vigilance, the main question for the ECB will be whether to go for a preemptive insurance hike or stay put. Market expectations have already tightened the monetary policy stance in recent weeks. Real long-term interest rates, for example, are at levels last seen in the period between 2013 and 2016. It is these market expectations that are likely to shift the needle towards a rate hike. We have been there before – an ECB stressing that not delivering on market expectations would actually ease the monetary policy stance."

"A tighter monetary policy stance and creeping inflationary pressure are why we think that a rate hike is almost a done deal. Isabel Schnabel’s comments earlier this week confirmed the direction of travel. In fact, it would probably require another sharp deterioration in economic sentiment for the ECB not to hike. Even if the war in the Middle East were to end tomorrow, the damage to inflation has already been done. Inflation has started – and will continue – to hit the eurozone economy."

"Given the 2022 experience, the ECB is likely to opt for an 'insurance' rate hike. Not that a rate hike will do a lot to affect inflation expectations, but it would be a symbolic move, stressing the ECB’s determination to act."

"What's even more interesting is what will happen beyond the June meeting. Markets have started to price in a total of three rate hikes. However, as long as fiscal stimulus remains muted, the risk of an outright inflationary spiral remains small, making an aggressive monetary policy reaction to the current energy price shock unlikely."

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