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Title: Hawkish ECB prompts banks, markets to ratchet up rate hike bets again

Jun 10, 2022 05:45AM ET

By: AnalysisWatch

A day after the European Central Bank (ECB) surprised markets with an unexpectedly aggressive stance on rising inflation, investment banks are increasing their bets on eurozone rate hikes in the coming months.

Deutsche Bank now expects the ECB to make two hefty 50-basis-point rate hikes this year after initiating a quarter-point tightening cycle in July.

Morgan Stanley said that after Thursday's ECB meeting, it revised upward the size of the rate hike expected at the September meeting to 50 basis points, while adding another 25 basis point increase in October to its new rate call.

The ECB will end a long-running stimulus program by announcing next month its first rate hike since 2011, followed by a potentially larger move in September.

With record-breaking inflation at 8.1% and rising, the ECB now fears that price growth is expanding and could trigger a wage-price spiral that ushers in a new era of stubbornly rising prices.

While ECB chief Christine Lagarde had already hinted at a series of rate hikes in her recent comments, the tone of the ECB's comments on Thursday surprised markets.

This led to a further increase in rate hike bets in financial markets, which were already aggressively priced in.

Money market futures now suggest the ECB is pricing in a rate hike of nearly 150 basis points by the end of the year, up from 140 basis points immediately after Thursday's ECB statement and around 135 basis points on Wednesday.

And by the September meeting, 75 basis points of hikes are priced in, suggesting that traders expect the ECB to take a 50 basis point rate step at that meeting after raising a quarter point in July. They had been moving in that direction ahead of Thursday's meeting.

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