European Central Bank: Inflation-driven hike prospects – DBS

DBS Group Research anticipates the European Central Bank (ECB) will increase the deposit facility rate to 2.50%, citing a strong combination of inflation and economic growth in the Eurozone. Headline inflation has surpassed target levels, while core pressures continue to stay in check. Analysts caution about potential risks from rising wage and service sector inflation, and note higher European bond yields due to investor concerns.

Inflation surged to 3.3% year-over-year in August, up from 2.9% in July, moving further from the 2% target, primarily due to a 14.3% increase in the energy component. The resilient inflation-growth mix suggests policymakers may be convinced that the economy can handle additional monetary tightening. However, the ECB is wary that persistent inflation could eventually trickle down to wages, services, and inflation expectations, prompting them to act proactively.

Meanwhile, a sell-off of global bonds has also elevated European rates, indicating growing investor wariness about large deficits amid geopolitical tensions, heightened defense spending, and other uncertainties. The ECB Governing Council is expected to lift the benchmark deposit facility rate by 25 basis points to 2.5%.