ECB Rate Hike Expected in June: Tightening Transmission Begins, Beware of Financial Market Repricing
Recently, the European Central Bank (ECB) has taken a clearly hawkish policy stance. Over the past month, hawkish voices within the ECB have been intensively released, almost forming a "June rate hike" consensus. In April, the overall HICP inflation rate in the Eurozone rose to 3.0%, with energy inflation soaring from 5.1% in March to 10.8%, making it the primary driver of rising prices. More importantly, concerns about secondary inflation within the ECB are rising rapidly.
On May 26, Executive Board member Isabel Schnabel, considered the most hawkish official, made it clear that "the scale and duration of the current shock can no longer be ignored." Even if the conflict ends immediately, the damage to global energy infrastructure and supply chains will persist for a long time, so "a June rate hike is necessary." Central bank governors and Governing Council members from EU countries, such as Joachim Nagel of Germany, Martin Kocher of Austria, and Yannis Stournaras of Greece, have all continued to release hawkish signals. Even the relatively dovish Stournaras admitted that, to maintain the ECB's credibility, a rate hike in June "might be inevitable." ECB President Christine Lagarde also confirmed that, due to changing circumstances, the March forecast for a 2.6% increase in prices this year may be revised upward.
Judging from both the frequency and intensity of recent statements, the ECB is clearly guiding expectations ahead of the June meeting. The market has now largely priced in a 25 basis point rate hike in June, with a 76.6% probability; further hikes in September are also being factored in.
In fact, the tightening effect triggered by expectations of a rate hike has already begun to transmit in advance. The market is currently pricing in a 60 basis point rate hike for the year, with the 10-year German bund yield rising from 2.6% at the beginning of the year to 3.2%. Sovereign bond yields have generally risen, and term premia have expanded significantly. Especially against the backdrop of an expanding fiscal deficit alongside increased defense spending, rising financing costs are putting pressure on European public finances.
Financial tightening has already been transmitted in advance, posing a test for the real economy and financial markets
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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