Economics: The ECB goes all-in.

Financial markets now expect the ECB to raise its deposit rate to 3.5%

After the ECB’s clear-cut December message, markets now expect the deposit rate to peak at 3.5% - almost 150bps higher than it is today. While that doesn’t sound unreasonable with core inflation at 5.2%, we think it could backfire for a few reasons.

But the real economy is weak & financial stability concerns are growing

First, the real economy is already on the brink and the ECB’s expectations of a shallow downturn look optimistic. Second, some of the concerns raised last year are tentatively easing. And third, financial stability concerns are already growing.

Hiking so forcefully clearly exposes the ECB to unintended consequences

It’ll take more than a few data points to shift the Governing Council’s bias. So we’ve updated our rate forecast accordingly. But we think the risk of a reversal this year has risen. Hiking by 375bps in a year exposes the ECB to unintended consequences.