ECB to hike once more in December as tighter conditions may not suffice: Deutsche Bank

Deutsche Bank now expects the European Central Bank to deliver one more rate hike in December, reflecting a view that policy tightening already implemented may not be enough to bring inflation back to target. The transmission mechanism runs through rate expectations and the euro: a higher terminal rate path widens the policy differential against markets where easing is priced, supporting the euro through capital inflows into euro-denominated assets. Euro-area government bonds, particularly longer-dated German Bunds and peripheral spreads, are most exposed to a repricing of the terminal rate, while rate-sensitive equities and interest-rate-sensitive credit could face renewed pressure if financing costs stay elevated. The next concrete catalyst is the euro-area flash HICP inflation release, whose services and core components will determine whether the case for an additional December move strengthens or weakens.

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