European Central Bank: Dovish hike path as energy drives inflation – ING

ING’s Carsten Brzeski expects the European Central Bank (ECB) to raise rates by 25bp next week, characterizing it as an ‘insurance’ or dovish hike. He notes Eurozone resilience, but stresses that inflation is mainly driven by energy, limiting the case for further tightening. Brzeski argues additional hikes could harm the Eurozone economy and risk recession despite neutral-rate estimates.

ING sees limited further tightening scope

"We expect the ECB to hike interest rates by 25bp next week. As long as inflation remains mainly energy-driven, hiking rates further beyond next week would not make a lot of sense and could harm the eurozone economy."

"At the same time, headline inflation has continued to edge higher and looks set to stay above 3% year-on-year for the remainder of the year, even if other inflation measures like core and services currently provide no reason to panic. With oil prices remaining elevated and the risk of a fresh gas price shock increasing, it will be hard for most ECB policymakers not to see a clear case for another rate hike."

"Even if the ECB doesn’t like the term, the second rate hike this year would also fall into the category of ‘insurance rate hike’, or maybe more to the central bank's liking: a rate hike to strengthen its credibility and to preempt any possible indirect or even second-round effects from the current energy price shock."

"However, with one additional rate hike (next week), the deposit rate at 2.5% would still be within the range the ECB itself calls neutral. Going further would mean that the ECB sees restrictive monetary policy as necessary."

"All in all, we expect the ECB to hike interest rates by 25bp next week. Another insurance rate hike. Or for those who don’t like this term: a dovish rate hike."