Nomura’s Global Markets Research Team expects the ECB to keep rates on hold through 2026, assuming Brent and Dutch TTF futures fall back towards pre-conflict levels. However, they warn that persistently elevated energy prices could force two rate hikes this year, as markets already price in higher inflation and modest tightening.

Energy shock tests ECB reaction function

"Financial markets price around 25bp of ECB rate hikes by December 2026 and around 33bp of ECB rate hikes by December 2027. Markets are pricing hikes in response to the upward shift in Brent crude oil and Dutch TTF natural gas futures curves, and the expected rise in HICP inflation in response."

"We maintain our view that the ECB will keep rates on hold this year and next, though this view is based on an inherent assumption that events will unfold in a way that pushes Brent crude oil and Dutch TTF natural gas futures curves down to levels similar to prior to the conflict, and therefore the impact on the real economy will be limited."

"Ultimately, if futures curves as they were at their recent peak are realised by the time of the ECB’s June meeting, we believe the ECB would have to raise rates twice this year, with a strong possibility of a first rate hike occurring at the June meeting. Meanwhile, if energy commodity prices stabilised at levels around their recent peak by the June meeting, this would result in a larger addition to HICP inflation forecasts relative to the sensitivity analysis over the forecast horizon, as crude oil and natural gas futures curves are downward sloping. We believe the latter scenario may force an additional rate hike."

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