Investors adopt “higher for longer” view on ECB rates

Written by Stefano Ribodo and Linda Baskini

(Reuters) -Investors are increasingly priced in a “higher” on the euro area, with a possible reduction in March as a temporary edge before borrowing rates climbed over 2 %.

A number of market measures indicate that price expectations indicate that investors are increasingly concerned about the impact of definitions after the last trade deal between the United States and the European Union.

They are also confident that the sharp increase in financial spending in Germany will strengthen the economy, which reduces the need for more price cuts in the long run.

Several investment banks, including Goldman Sachs, have reviewed their expectations, now expected that the European Central Bank has ended the current mitigation cycle.

Although commercial risks may still weigh growth and inflation, these banks believe that the European Central Bank, which provided an optimistic evaluation of the eurozone economy after its last meeting, is likely to hold 2 % rates in the foreseeable future.

It is wrong to be careful, the market pricing at the risk of contraction pressure in early next year if the tariff negotiations are stumbled, which appear as a reduction in the rate of European papers in March.

Meanwhile, the euro increased by almost 3 % this month, as investors are increasingly expecting that the US Federal Reserve will resume interest rate cuts in September, while the European Central Bank remains.

It was a “longer period” that dominated the markets in 2022 and 2023, as central banks struggled with stubborn inflation caused by the roaming epidemic and Russia’s invasion of Ukraine.

Here are some market indicators that reflect their return.

Estr Forwards Edge about 2 %

Futures on the official interest rate of the European Central Bank overnight, the ESTR rate, which means about 60 % chance to reduce the average of 25 in March, and the deposit rate of 1.92 % in December 2026.

This reflects the assumptions of merchants on the potential path of monetary policy.

“In the short term … there are possibilities for inflation without danger. It is a little from Trump. It is some economic weakness,” said Carsten Barzky, Global Chief of College Research at Engy.

“Our outlook is that inflation will remain more than 2 % in the coming years, driven by financial spending and restructuring supply chains, which will increase the costs of companies,” he said.

He added that policy rates can reach the highest level of the European Central Bank by 1.75 % to 2.25 % for the neutral rate – which is neither sufficient nor restricted – and turns into tightening lands if necessary.