ING strategists Michiel Tukker and Benjamin Schroeder note that markets continue to price in two to three European Central Bank (ECB) interest rate increases in 2026, with rates still elevated for April. They emphasize that the ECB must balance its dependence on data with managing expectations along the curve. They emphasize oil as a key variable and see the risks associated with policy actions to prevent price spirals.

The ECB is balancing on the edge of expectations

“Markets appreciate US efforts to reach an agreement, but without concrete steps, the overall narrative of two to three ECB rate increases this year remains unchanged. Even in April, market prices still point to a 60% chance of a hike. The key variable to watch remains the price of oil, which hasn’t really changed much since the beginning of this week.”

“Nevertheless, market prices, particularly in April, appear aggressive in the context of President Christine Lagarde’s comments on Wednesday morning, which suggested that the ECB would not act until it had sufficient information and was able to analyze the short-term price shock, highlighting the differences with the situation in 2022.”

“There could still be a more decisive reaction from the ECB, which would nip the price spiral in the bud. This is the market’s valuation – and it is combined with the relative stability of long-term (forward) inflation swaps. However, the market also expects a partial reversal, as indicated by a hump, e.g. in the Euribor futures band.”

“At this stage, the ECB is balancing market expectations and the curve. If it sounds too dovish, there is a risk that the long end will run away as inflation expectations fade. If it sounds too hawkish, growth concerns take over.”

“At some point, it may even be necessary to meet market expectations to maintain balance and buy time.”

(This article was created with the lend a hand of an artificial intelligence tool and has been reviewed by an editor.)