Recent signals from senior European Central Bank (ECB) officials have cooled expectations for aggressive rate hikes, but forward markets may still be overstating tightening prospects, Commerzbank analysts said.
Forward rates point to more hikes than data justify
According to the bank, traders are currently pricing in a little over two rate hikes for 2026, even though underlying data and energy costs do not fully support such a path.
Their report notes that forward markets now imply around 4 basis points of additional tightening by the end of April, 22 basis points by June, and 52 basis points by December. This marks a shift toward a less aggressive profile after a wave of cautious comments from top ECB policymakers and a moderation in oil prices.
Commerzbank argues that this pricing likely overshoots the ECB’s true appetite for further tightening under present economic conditions.
Lagarde’s scenarios do not clearly justify more hikes
ECB president Christine Lagarde said this week that the eurozone economy is tracking between the central bank’s baseline and adverse scenarios.
Commerzbank stressed that even the adverse scenario does not, on current projections, clearly point to the need for extra rate hikes. The bank also highlighted that the adverse path assumes the same rate trajectory as the baseline, despite earlier remarks implying otherwise. Those remarks were subsequently corrected in the official transcript.
Data show Euribor forwards remain higher than on 11 March, while energy futures are trading below the levels assumed in the adverse scenario.
June meeting in focus, oil is the key swing factor
With almost seven weeks until the June policy meeting, Commerzbank sees the outlook as highly fluid.
Their analysis suggests that, barring a renewed and sustained oil shock pushing crude decisively above 100 dollars per barrel, additional rate hikes beyond what is now priced look unlikely in the current market setup.
Inflation spike driven by energy complicates the picture
Recent inflation data reinforce Commerzbank’s view that markets may be running ahead of the ECB.
Euro area headline inflation jumped to 2.6 percent in March from 1.9 percent in February, a move largely driven by higher energy prices. The ECB now projects average headline inflation of 2.6 percent in 2026.
Despite the acceleration, senior officials continue to stress a gradual, data-dependent approach. Governing Council member Joachim Nagel recently said the ECB cannot commit to a specific rate decision yet, underscoring the institution’s cautious stance.
Growth risks limit room for tightening
The ECB faces a more fragile growth backdrop as it weighs further moves. Higher borrowing costs risk undermining a weak recovery, with many analysts cutting 2024 growth forecasts to around 0.9 percent, citing the drag from elevated energy costs on firms and households.
Geopolitics and IMF views shape rate expectations
Market expectations have been highly sensitive to geopolitical developments. Traders recently scaled back pricing from as many as three hikes this year to around two after a ceasefire in the Middle East eased some risk premia.
The International Monetary Fund, however, said on Friday that it still expects the ECB to raise rates by about 50 basis points over the year to maintain a neutral policy stance.
Asset prices vulnerable to policy surprises
This tension between official rhetoric and market pricing is feeding into a fragile environment for rate-sensitive assets.
Commerzbank notes that current prices in several markets already reflect the impact of two rate hikes. That leaves valuations exposed to sharp moves if incoming inflation data or ECB communication diverge from this embedded assumption.
Over the near term, the direction of these assets will depend on whether the ECB’s actions track its own cautious tone or move closer to the more forceful tightening path that traders currently have built into forward curves.
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