Amid elevated energy prices and heightened inflation persistence, the European Central Bank's policy outlook has once again drawn market attention. Asset management firm Vanguard believes that even if a ceasefire agreement is reached between the U.S. and Iran, the ECB may still proceed with interest rate hikes in the coming months. Ales Koutny, Head of International Rates at Vanguard's active management division, stated that if oil prices remain around $100 per barrel heading into summer, the likelihood of the ECB raising rates by 25 basis points in both June and July is "quite substantial." Even if oil prices retreat to approximately $95 per barrel, it would still fall within the range where "the central bank needs to hike rates." This outlook is notably hawkish and more aggressive than current market expectations. Markets have largely priced in a rate hike in June, but assign less than a 50% probability to another increase in July. Previously, market expectations for rate hikes eased and German government bond prices rose after comments from former U.S. President Donald Trump contributed to a decline in oil prices to around $90 per barrel. Koutny further indicated that if the ECB implements two consecutive rate hikes, the euro could appreciate to $1.25 by year-end, representing a nearly 7% increase from current levels and reaching its highest level in eight years. This forecast aligns with the most bullish expectations in market surveys. Additionally, he emphasized that subsidies introduced by European governments to cushion households from rising energy costs, alongside increased fiscal spending to bolster defense capabilities, could further amplify inflationary pressures, thereby reinforcing the necessity for the central bank to tighten monetary policy.
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