Deutsche Bank now expects the European Central Bank to raise its deposit rate by 25 basis points in September and follow with another 25bp hike in December, as persistent energy risks keep upward pressure on inflation.
The bank's research unit had previously forecast a terminal rate of 2.5% for the deposit facility (currently at 2.25%), but now says those assumptions are being challenged. Although ongoing tensions with Iran add upside risk to inflation, the eurozone labor market remains relatively soft, with little evidence so far that broader price pressures are feeding into wage growth.
Deutsche Bank sees 2.75% as the more likely terminal rate, but notes that a faster easing of geopolitical tensions and weaker growth could cap the rate at 2.5%, while a move above 3% lacks justification in the absence of broader inflation pressures. The ECB is scheduled to announce its rate decision on September 10, with markets widely expecting a hike.