Traders Wager European Central Bank Rate Hikes Are Almost Over

Money markets are betting the ECB is almost done tightening monetary policy after their latest hike.

(Bloomberg) — Money markets are betting the European Central Bank is almost done tightening monetary policy after the central bank lifted the deposit rate for a 10th straight time Thursday and signaled rates have now reached a level that will make a “substantial contribution” to bringing inflation under control.

Traders are wagering on fewer than 5 basis points of monetary policy tightening by year-end, according to swaps tied to policy meeting dates, an outcome that suggests Thursday’s policy tightening may be the final move in this cycle. 

The central bank’s downward revision of core inflation projections suggests “that the ECB has completed its hiking cycle,” said Theophile Legrand, a rates strategist at Natixis SA.

While the 20-nation euro zone continued to eke out growth in the second quarter, sentiment indicators suggest it’s since taken a turn for the worse.

Business surveys show services have started to follow manufacturing into a decline as sticky inflation takes a toll. Weak global demand and China’s slowdown are weighing on exports, while construction is dwindling in part due to higher financing costs.

That toxic mix has raised the specter of stagflation — even though the current situation differs greatly from the 1970s and 1980s, when unemployment shot up, in contrast to the record lows seen at present.

ECB President Christine Lagarde will brief the press in Frankfurt at 1:45 p.m. London time. 


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