Markets Bet on European Central Bank Rate Hikes

Money markets are increasing bets that the European Central Bank will adopt a more hawkish monetary policy, with traders anticipating the deposit rate could reach 3% by late 2027. The bank is widely expected to raise interest rates to 2.5% in September, following a previous tightening move in June.

This shift is driven by persistent inflation risks linked to the U.S.-Iran war, broader geopolitical tensions, and energy pressures. Brent crude prices exceeding $90 per barrel and the lowest euro zone natural gas inventories in over a decade have fueled these concerns. Other inflationary drivers include tight labor markets, increased defense expenditure, and investments in green energy.

While some economists believe a Middle East peace agreement before the November U.S. midterm elections remains the baseline scenario, a failure to reach such an agreement could trigger a broader and more aggressive tightening cycle.