The ECB Gets Ahead of the Curve

In September, the ECB raised its key interest rates by 25 bps for the second time this year, bringing its deposit rate to 2.50%. However, inflation does not yet appear to be accelerating significantly beyond goods and services directly affected by energy prices. As the chart below shows, the share of CPI components with price increases above 2.0% has remained broadly stable.

Our analysis

Historically, rate-hike cycles have generally coincided with periods of broad-based inflationary pressures.

In 2021-2022, the ECB, like other central banks, was slow to raise rates, waiting until summer 2022, even as inflation had already risen sharply and was widespread across almost all goods and services in the representative consumption basket.

Today, the ECB is clearly choosing to act early, in anticipation of a possible pass-through of the energy shock to other prices. However, beyond the current disruption in the Strait of Hormuz, energy markets remain well supplied, which should allow prices to normalize over time. Furthermore, easing labor-market pressures could limit the pass-through to wages and other prices.

Markets are pricing in almost six ECB rate hikes in total by July 2027, which is excessive in our opinion given the current situation