Markets price in a more than 50% chance of one ECB rate hike by July
By Stefano Rebaudo
March 6 (Reuters) - Money markets increased their bets on further European Central Bank tightening on Friday, pricing in more than a 50% chance of a 25 basis‑point rate hike by the summer as the Middle East conflict stoked inflation fears.
German short-dated yields inched higher again and were set for their biggest weekly rise in almost three years.
Germany's 10-year government bond yield DE10YT=RR, the bloc's benchmark, was flat at 2.85%, after reaching a fresh one-month high at 2.878%. It is on track for a 20-bp weekly rise, the biggest since March 2025.
Money markets are pricing in a 55% chance of a European Central Bank rate hike by July EURESTECBM4X5=ICAP and an 85% chance by December EURESTECBM7X8=ICAP.
"I think it’s too soon to assume the ECB will hike again, oil prices are basically back at 2024 levels," said Massimiliano Maxia, senior strategist at Allianz Global Investors.
"If energy prices climb further, then the picture could change," he added.
Crude oil was headed on Friday for its sharpest weekly gain since Russia launched its full-scale invasion of Ukraine in February 2022.
SCHNABEL COMMENTS IN FOCUS
"With (ECB board member) Isabel Schnabel scheduled to speak in New York late in today's session, market participants are probably nervous about a 'zero tolerance' message and wary not to take the other side in the hawkish ECB trade," said Christoph Rieger, head of rates and credit research at Commerzbank.
Germany's two-year yields DE2YT=RR, which are more sensitive to policy expectations, were up 1.5 bps at 2.27%. They hit 2.31% earlier in the session, their highest since March 6.
"Traditionally, oil price shocks tend to be stagflationary for the euro zone, which often motivated the ECB to simply look through oil-driven inflation surges," said Carsten Brzeski, head of macro strategy at ING.
"However, the risk of such an approach is falling behind the curve, as could be witnessed in 2022," he added.
There is no "preset pace for our monetary policy stance," President Christine Lagarde said on Thursday. Bank of Spain governor Jose Luis Escriva said it was "very improbable", based on current information, that the bank would make a decision on interest rates in the governing council's next meeting.
"If our central scenario proves to be correct, however, the shock should be quite modest and short-lived," said Raphael Olszyna-Marzys, international economist at J. Safra Sarasin, after arguing that most estimates suggest that a 15% rise in oil prices would add about 0.2-0.4 percentage points to headline inflation over the coming year and trim GDP growth by 0.1-0.3%.
"Rate cuts may be delayed, but outright rate rises still look unlikely," he added.
Italy's 10-year government bond yields IT10YT=RR rose 1.5 bps to 3.59%. The gap versus Bunds stood at 73 bps. It hit 53.50 in mid-January, its lowest since August 2008.
