TD Securities strategist Pooja Kumra notes that ECB officials have turned more hawkish as energy‑driven inflation risks re‑emerge, but the bank’s base case is still for only one rate hike toward late 2026. Markets have swung from modest cuts to pricing cumulative 2026 hikes, while ECB research suggests long lags from policy to inflation, especially for services.

Market shifts from cuts to modest 2026 hikes

"Research from the ECB suggests that a 50bp hike can reduce inflation by 0.2-0.3% within 12-18 months while service inflation requires more than 24 months for transmission."

"This big lag also suggests why the ECB members have started to sound hawkish without waiting for the story to unfold."

"Markets have shifted sharply from pricing 8-9bp of ECB cuts for this year (as of 27 February) to pricing a cumulative 40bp of hikes in 2026."

"Our base case remains for the ECB to deliver one rate hike towards the end of 2026."

"Should the response shift towards aggressive fiscal support, central banks (particularly those already operating near neutral such as the ECB) may be less constrained by growth risks when considering further hikes."

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