We see the market has priced in three ECB rate hikes this year, but this view seems increasingly aggressive. The latest Eurostat flash estimate confirmed the Euro area economy barely grew, expanding by just 0.1% in the first quarter of 2026. This sluggishness casts serious doubt on the ECB’s ability to tighten policy beyond September.
While April’s headline inflation rose to 3% due to energy costs, we must note that core inflation actually eased to 2.2%. This divergence is key, as it suggests underlying price pressures are not accelerating uncontrollably. Looking back at the post-pandemic inflation of 2021-22, we learned that central banks can become hesitant when growth falters, even if headline numbers are high.
Growth Risks Versus Inflation Signals
Recent surveys on bank lending and consumer confidence clearly point to rising downside risks for the economy. The latest S&P Global Eurozone Composite PMI reading also fell to 50.8 in April, barely above the 50 mark that separates growth from contraction, reinforcing this cautious outlook. This suggests opportunities in derivatives that bet against the market’s hawkishness, such as receiving fixed rates on swaps dated for the fourth quarter.
Our base case remains firm on rate hikes in June and September, driven by the need to anchor inflation expectations. However, the weak growth outlook makes a third hike highly improbable. Current pricing in Euribor futures for December 2026 implies a policy rate that we believe is at least 25 basis points too high, presenting a clear opportunity for traders in the coming weeks.
