Euro: Markets test ECB reaction function – Rabobank

Rabobank's Senior Macro Strategist Bas van Geffen indicates that European money markets now anticipate over four further European Central Bank (ECB) rate increases, surpassing the two already announced. Investors are accelerating their expectations ahead of the policymakers. ECB President Lagarde has shown reluctance to endorse market knowledge of the reaction function, with leaks suggesting any forthcoming move may occur in December rather than October.

Despite markets anticipating more than a single rate hike, central banks have demonstrated a more proactive approach in the past.

Financial tightening resulting from rate hike expectations may not bother policymakers, but markets might have become overly optimistic, as the central banks are struggling to balance inflation and growth concerns amid increasing uncertainty. ECB President Lagarde rejected reaffirming that markets "understand the ECB's reaction function well" during her press conference last week, implying that markets may be moving ahead of policymakers.

Inflation pressures are primarily driven by supply shocks, with energy-induced inflation expected to rise further. However, there is no evidence of inflation spreading. Anonymous sources leaked to MNI News indicated that the next move in rate hikes is more likely to take place in December rather than October.