The European Central Bank is facing intensifying pressure to maintain a hawkish trajectory, as key policymakers signal that the recent rate hike may be merely the opening move in a renewed tightening cycle.
The shift in tone follows the central bank's decision on Thursday to lift the deposit facility rate by a quarter point to 2.25%, marking its first tightening cycle since 2023.
Bank of France Governor Francois Villeroy de Galhoud reinforced this stance, stating the ECB stands ready to take necessary measures to anchor inflation expectations, effectively challenging the dovish consensus that had dominated markets prior to the move.
Adding to the market dialogue, a commentary in Handelsblatt highlights the surprising acquiescence of ECB doves to the rate increases, framing the central bank as a "pioneer against inflation." The piece notes that while falling oil prices—driven by recent signals of geopolitical relaxation—are providing some relief to eurozone inflation pressures, the ECB's leadership remains committed to a firm trajectory.
This internal consensus suggests that policymakers are prioritizing the prevention of entrenched inflation over near-term growth headwinds, keeping the door open for additional tightening if data warrants it.
Markets are now recalibrating their expectations for the eurozone rate path, with traders pricing in a higher terminal rate and a slower pace of future cuts.