📝See Risks Of ECB 50Bps Hike In May: SEB Strategy

As the banking turbulence has calmed down and high inflation remains in focus, the market’s policy rate expectations have increased substantially since the March meeting. Currently, forwards are fully discounting a 25bps May hike with some risks for 50bps (32bps discounted), and a peak €STR rate of 3.65% in September, implying a deposit rate of around 3.75%. We maintain our view of 25bps ECB hikes in May, June and July and regard the current market pricing as fair in reflecting an around 30% risk for a 50bps rather than a 25bps rate hike in May.

We see no evidence that inflation indicators or realised numbers will weaken enough in the coming few months for the ECB not to continue raising rates. Although our core HICP profile suggest a slightly lower inflation rate in the coming two months before temporary rising again, the overall impression is roughly sideways-moving inflation at a still too high level, thus keeping the ECB on alert.

In the slightly longer term, we expect inflation in the coming six months to be higher than the current ECB staff projection, but the economic activity also to weaken. We think that the ECB may begin turning slightly softer during the summer, potentially supported in June ECB staff macro projections.

- SEB Rates Strategy