Deutsche Bank economists expect the European Central Bank (ECB) to keep the deposit rate at 2% while markets fully price a June hike due to Europe’s energy exposure. They argue uncertainty over Oil prices and inflation pass-through means the ECB will likely retain hawkish optionality, emphasising a meeting-by-meeting approach as Euro inflation swaps and Bund yields hit multi-year highs.

Rates on hold but hawkish optionality

"For the ECB, it’s widely expected they’ll keep their deposit rate on hold at 2%. But given Europe’s exposure to the energy shock, markets are fully pricing in a hike at the next meeting in June, so the question today is whether the ECB validates that view."

"Our European economists think there’s still too much uncertainty about what happens to energy prices and the extent to which that propagates into inflation, so the ECB will want to gather more information before deciding in June whether to hike or not. In the meantime, they think the ECB will retain some hawkish optionality and emphasise a meeting-by-meeting approach to decisions."

"Indeed, the 1yr Euro inflation swap (+23.3bps) hit a three-year high of 3.87%, and markets are now pricing in 83bps of ECB rate hikes by the December meeting, up +10.9bps on the day."

"So collectively, that pushed yields up to new highs across the continent, with the 10yr bund yield (+4.3bps) closing at a new post-2011 high of 3.11%."

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