Economists at ING expect the European Central Bank (ECB) to raise interest rates by 25 basis points (bp) at their upcoming meeting, which would push the deposit rate to 2.5%. This aligns with the views of the majority of respondents in a Bloomberg survey who also anticipate a 25 bp hike, with the rate then remaining stable through 2027. ING's analysis suggests this increase would be an "insurance rate hike" to strengthen credibility and preempt potential indirect inflation effects from energy price shocks, rather than a move towards explicitly restrictive monetary policy.
Despite market pricing indicating an additional 75 bp of cumulative rate hikes through June 2027, ING Bank strategist Francesco Pesole believes these expectations are overly hawkish. ING assigns a 55% probability to a scenario where the ECB delivers a 25 bp hike accompanied by dovish forward guidance, while only a 30% chance is given to a clearly hawkish signal. Pesole argues that further tightening without sufficient economic data support would unjustifiably shift policy into restrictive territory, which is not currently warranted given the eurozone's resilience rather than overheating.
ING also highlights that while headline inflation has remained elevated, core and services inflation do not currently suggest a need for more aggressive tightening. The bank posits that the current inflation wave is primarily energy-driven, and further rate hikes beyond next week's would not make sense and could harm the eurozone economy, especially amid public finance woes and surging bond yields. They emphasize the difference between an economy showing resilience and one that requires restrictive monetary policy, suggesting that the ECB may be reluctant to risk a recession to tackle what is still considered a supply-side shock.
