Iran energy shock to force ECB 'insurance hike' – But markets have gone 'too far'

Ebury's analysis suggests that the ECB is almost certain to deliver another rate hike on Thursday in response to the energy shock from the Iran war. But while markets are pricing in further hikes in December and March, Ebury believes this week's move will be the last in what it sees as an unusually short two-step tightening cycle.

Key points:

• ECB set to hike the deposit rate to 2.5%, the upper bound of neutral.
• New projections due, but focus will be on Lagarde's press conference.

• ECB likely to stay non-committal on the rate path ahead.

• Markets price another hike in December and one more by mid-27.

• We don't expect further hikes beyond this week’s meeting.

• Bar for a hawkish surprise is high given aggressive market pricing.

Roman Ziruk, Lead FX Strategist at Ebury, said: "We think that Lagarde is unlikely to precommit to a rate path, as this would be somewhat out of character given that in June she pushed back against the 'insurance hike' label, while in July, although she indirectly hinted at a possible September move, she still stuck to her data-dependent mantra.

Investors will be looking for signals in her rhetoric that could hint at the path ahead. If she notes that rates are at the top of the neutral range, this could be a signal that the bar for further hikes is high, whereas concern over second-round effects taking hold the longer the conflict runs would act to keep a December hike alive.