ABN AMRO's Senior Economist Bill Diviney argues the ECB is likely to raise rates at its April and June meetings, taking the deposit rate to 2.50% to prevent de-anchoring of inflation expectations. Diviney has stronger conviction about the April move, noting a possible pause in June if the conflict ends and energy prices normalise and expects limited second-round effects compared with the 2022 energy shock.

Governing Council seen front-loading hikes

"ECB to hike pre-emptively already in April We expect the ECB to raise rates already at the April and June Governing Council meetings, taking the deposit rate to 2.50%, in order to pre-empt any de-anchoring of inflation expectations."

"We have more conviction in the April hike than the June hike, given the ongoing uncertainty of the conflict."

"It could well be the case that with the conflict ending and energy prices quickly normalising, the Governing Council gains enough visibility on the inflation outlook that it holds off from hiking in June."

"Policy tightening would be aimed at preventing second round effects from the energy shock spilling over to the labour market specifically – something we saw in the aftermath of the 2022 energy shock, which coincided with a relatively tight labour market and therefore encouraged workers to demand pay rises to compensate for the real income shock."

"The combination of a smaller initial inflation shock, pre-emptive ECB tightening and a higher starting point for interest rates, as well as a looser labour market, should prevent such a dynamic from taking hold this time around."

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