MUFG Research discusses the ECB policy outlook and argues that the rate market is ahead of itself in pricing aggressive tightening cycle from the ECB over the coming year.
"We continue to believe that the European rate market is pricing in too much tightening from the ECB in the year ahead in light of downside risk to the growth outlook. The European rate market has recently scaled back rate hike expectations but is still pricing in 150bps of hikes by year end and 225bps hikes by this time next year. It would take the ECB’s policy rate towards the top/above of estimates of the neutral range. A sharper than expected slowdown for the euro-zone economy will act to dampen the need for the ECB to raise rates as much going forward," MUFG notes.
"We are also more wary that the euro-zone economy could be hit by a bigger negative shock from tighter energy supplies in 2H of this year," MUFG adds.
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