ECB’s Cipollone urges caution as markets bet on sharper rate hikes

Financial markets are increasingly positioning for a more hawkish European Central Bank, with investors now betting the deposit rate could reach 3% by late 2027 — a scenario that was barely considered just a month ago. The shift reflects persistent concerns that geopolitical tensions and elevated energy prices will keep inflation above target for longer than previously expected.

Rate Expectations Climb Despite Oil Retreat

According to Reuters ↘ 4.69%, markets are pricing a roughly 25% probability of the ECB deposit rate reaching 3% by March 2027 and about a 60% chance by September 2027. Just one month earlier, investors saw virtually no chance of hitting that level by March. The ECB is widely expected to raise its deposit rate from 2.25% to 2.5% at its September 10 meeting, following a June hike that responded to inflationary pressures unleashed by the U.S.-Iran conflict.economictimes.indiatimes+3

Rate-hike expectations have persisted even as oil prices retreated from their April peak near $120 per barrel. Brent crude remains above $90, while tight refined fuel markets, low eurozone gas inventories, and the prospect of a prolonged conflict have reinforced concerns about sustained price pressures.reuters+1

Cipollone Pushes Back on Stagflation Fears

ECB Executive Board member Piero Cipollone offered a more measured assessment on Monday, telling Italian outlet ilsussidiario.net that inflation remains consistent with the ECB's baseline scenario and "seems to be a long way from the adverse and severe scenarios". He said the risk of economic stagnation combined with a sharp rise in inflation was "rather remote" and noted signs that the geopolitical crisis "could soon be resolved".econostream-media+1

Cipollone cautioned that in the face of a supply-side shock, hiking rates aggressively "could dampen economic growth that is already affected by a negative shock," arguing instead that monetary policy "needs to be well calibrated".econostream-media

Structural Pressures Complicate the Outlook

Beyond the energy shock, longer-term factors are complicating the ECB's task. Expansionary fiscal policies, increased defense spending, green-transition investment, and persistent labor-market tightness are weakening the disinflationary trends seen before the pandemic. Eurozone business activity in August grew at its fastest pace of the year, potentially giving policymakers greater scope to keep rates elevated.mezha+1

The five-year euro short-term rate swap — a benchmark for the neutral rate — climbed to around 2.85% on August 20, its highest since November 2023, suggesting investors believe monetary policy may need to remain tighter for longer. As ING economist Carsten Brzeski noted, market pricing for rates now largely reflects the assumption that the conflict "will last until November".economictimes.indiatimes+1