ECB Will Hike Twice This Year: Deutsche Bank

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Deutsche Bank says the ECB will hike rates twice this year as Middle East conflict reignites inflation fears.

The European Central Bank is now expected to raise interest rates twice this year as the Middle East conflict pushes inflation back to the top of the policy agenda, according to Deutsche Bank.

"We are changing our ECB call," analysts at the bank say, abandoning its previous view that rates would remain on hold through 2026.

The shift follows Thursday's policy update from the ECB and reflects a sharp reassessment of the inflation outlook; "current energy prices and forward curves imply that inflation will rapidly rise above 3% within the next couple of months and stay there through the rest of the year."

The ECB opted to avoid signalling imminent action and President Christine Lagarde struck a measured tone, arguing the Eurozone is "well positioned and well equipped" to absorb the shock, while indicating policymakers want to assess second-round effects before responding.

However, Deutsche Bank reads this as optionality with a clear bias.

"This was an ECB keeping its options open, but options in one direction only: tighter monetary policy."

Deutsche now expects two 25bp hikes, likely in June and September, taking the deposit rate to 2.50%.

"The inflation should be transitory. The risk is persistence," adds Deutsche Bank.

That risk is enough to justify a policy response, even as growth concerns rise and recession risks linger.

That being said, economists acknowledge that the outlook remains highly contingent on energy markets. A quick de-escalation would remove the need to tighten, while a prolonged disruption could force rates beyond neutral.