- No hard evidence yet of second-round inflation effects
- It may be difficult to conclude by April meeting if a rate hike is needed
- Leaving things to the June meeting offers us more data
- However, a rate move at the April meeting still cannot be ruled out
As things stand, traders are only pricing in a ~20% probability of a rate hike for later this month. However, those odds jump up significantly to ~81% by the time the June meeting comes along. And by year-end, traders are pricing in ~56 bps of rate hikes by the ECB at this present time.
Do keep in mind though that the market pricing has shifted modestly in the past week or so, as traders are feeling more optimistic about US-Iran developments and the lasting impact on inflation.
Besides Muller, we’re also getting some comments from policymaker Alexander Demarco:
- ECB needs to be patient, not rush any decision
- Euro are economy may be veering towards our adverse scenario
- If adverse scenario materialises, the two rate hikes seen by markets is a reasonable expectation
- Inflation expectations are well anchored for now, corporate pricing signals will be crucial
The narrative seems to be that they want to buy a little bit more time before taking action. That especially as there continues to be a cloud of uncertainty on how things will proceed next with the US-Iran conflict.
Markets might be optimistic and hopeful that a peace deal is coming
