Traders touch less certain of June rate hike as ECB grapples with Iran war

Traders were feeling a tad less ‌confident on Thursday that the European Central Bank would hike interest rates as early as June, as policymakers weigh the trade off ​between rising inflation and the hit to growth from higher energy prices.

The ECB held rates at 2 per cent, saying that the risks of both higher inflation and lower growth had intensified as the Iran war disrupts global energy flows.

Bond yields and the euro ​dipped after the decision as traders slightly trimmed their bets on a June hike. Money markets now price in 22 basis points (bps) of ⁠increases by June, compared to around 26 bps earlier on Thursday.

Two-year German bond yields, sensitive ‌to ‌ECB rate ​expectations, were last down 7 bps at 2.65 per cent.

A fall in oil prices from their highest level in four years helped drag yields lower, as did data ⁠from earlier in the session showing that ​the euro zone economy barely grew in the first ​quarter.

The tepid growth underscores how vulnerable Europe, a major importer of oil and gas, is to rising ‌energy prices and the tricky situation facing the ​ECB.

“The economic data released today does not yet warrant a rate hike,” said Felix Schmidt, senior economist ⁠at Berenberg.

“So far, inflation has been ⁠driven solely by the ​direct effects of energy prices. The ECB will wait to see how significant the indirect effects turn out to be in the coming months.”

However, markets are grappling with a fast-moving situation and expectations can swing wildly over short periods.

Two weeks ago, oil prices fell sharply in the wake of the April 8th ceasefire and traders had sharply reduced their bets on ECB hikes, only for them to ramp up again over the last week as oil prices rose again.

Money ‌markets now price in ⁠around 72 bps of ECB hikes by year-end, down from 76 bps earlier in the session.

The euro fell very slightly after the ECB’s decision, but was last up 0.2 per cent at $1.17, ‌while European stocks slightly extended their gains and were last up 0.9 per cent.

“The ECB acknowledged rising inflationary pressures but also more downward ​risks to growth,” said Carsten Brzeski, global head of macro at ING. “The policy ​statement didn’t give any hint at the next steps. It looks as if the ECB is in no rush to hike.”