More ECB hikes may be needed to stop inflation, Panetta says

Bank of Italy Governor Fabio Panetta stated that additional European Central Bank rate increases may be required to bring inflation back to target. The comments signal that the ECB's tightening cycle may not be complete, which keeps the policy rate expected to stay higher for longer and supports the euro through widening interest rate differentials against markets where easing is priced in. Euro-area government bonds, particularly short-dated maturities and periphery spreads, are most exposed, since markets must reprice terminal rate expectations and the risk of a prolonged restrictive stance. Euro-denominated equities, especially rate-sensitive sectors such as real estate and utilities, may face pressure if higher financing costs persist. Traders will watch the next euro-area flash HICP inflation release and the ECB's upcoming policy meeting for confirmation of whether the hawkish signal translates into a formal move.

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