ECB: Market questions zero-tolerance stance – Commerzbank

Commerzbank’s Christoph Rieger notes that markets have sharply repriced ECB expectations after the recent oil-driven sell-off, now discounting a more aggressive, zero-tolerance stance on inflation and higher year-end rates. He highlights that forwards imply a June hike and tighter policy into 2026, but questions whether the ECB can maintain such resolve given rising growth, financial stability and periphery risks.

Market repricing tests ECB resolve

"After ECB expectations repriced in a volatile session yesterday, forwards now attach a 60% probability to a June hike and price 33bp higher rates until year-end."

"The market is thus pencilling in a pro-active zero-tolerance ECB, which is willing to sacrifice growth to defend its inflation credibility."

"With the 2022 scars still visible, we may get more hawkish warnings over coming days to keep inflation expectations in check."

"However, we are not so sure."

"With growth and financial market risks rising, the periphery hit disproportionately and budgets becoming more constrained from higher energy prices while debt levels are already high, central bank tightening in reaction to the war in Iran may in the end not be as resolute as markets are pricing now."

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