Euro: Markets test ECB reaction function – Rabobank

Rabobank’s Senior Macro Strategist Bas van Geffen notes that EUR money markets now discount more than four additional European Central Bank (ECB) rate hikes beyond the two already delivered, as investors push expectations ahead of policymakers. He highlights ECB President Lagarde’s reluctance to endorse market understanding of the reaction function and cites leaks suggesting any next move is more likely in December than October, tempering front-loaded tightening bets.

Rate expectations race ahead of ECB

"Markets expect much more than a one-and-done hike, but the same goes for expectations embedded in curves where central banks have shown a more proactive response. Yesterday, EUR money markets priced more than four additional rate hikes on top of the two the ECB has already delivered."

"Policymakers probably do not mind some financial tightening that follows from rate hike expectations, but markets have probably gotten a bit too far ahead of the central banks – which are increasingly struggling to balance inflation and growth risks, and growing uncertainty."

"In her press conference last week, ECB President Lagarde already refused to reaffirm that markets “understand the ECB’s reaction function well,” which we construed as a hint that the market may be moving faster than the policymakers like."

"Even though energy-driven inflation is set to increase further, price pressures are still mostly driven by that supply shock and there is no evidence that inflation is spreading."

"Yesterday, anonymous sources “leaked” to MNI News that any next move would probably not be in October, but in December."

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