According to APP, market expectations for the magnitude of the European Central Bank's interest rate hikes have been significantly lowered. Currently, a cumulative rate hike of 57 basis points by the end of December is anticipated, equivalent to two 25 basis point hikes, while the probability of a third hike is only 30%. This adjustment represents a significant decline from the previously widely expected three-rate-hike path, primarily reflecting investors' concerns about the risk of a slowdown in European economic growth outweighing their worries about the persistence of inflation.

The latest interest rate swap market data shows that the European Central Bank's deposit rate is currently maintained at 3.75%, and the market has priced in a target range of approximately 4.32% for the policy rate by the end of 2026, a decrease of about 18 basis points from the initial expectation at the beginning of the year. This change indicates that the ECB prefers to maintain policy flexibility rather than aggressive tightening when dealing with potential weak demand.

To clearly illustrate the differences before and after the expected adjustments, the following table summarizes a comparison of market expectations regarding the ECB's interest rate hike path:

A deeper analysis reveals that this round of downward revisions in expectations is essentially a reflection of the European Central Bank's (ECB) reality of facing the dual constraints of "growth versus inflation." Recent Eurozone PMI data has consistently remained below the 50-point threshold, and the weak recovery in manufacturing in core economies like Germany has led the market to believe that additional tightening could exacerbate the risk of recession. Meanwhile, although energy prices have experienced periodic fluctuations, core inflation has fallen faster than expected, further weakening the necessity for interest rate hikes. The ECB president has also repeatedly emphasized recently that policy will be "data-dependent and decided on a meeting-by-meeting basis," leaving ample flexibility for the market.

Looking ahead, if Eurozone economic growth data continues to be weak, the European Central Bank (ECB) may pause interest rate hikes after its September meeting, or even shift to discussions on easing in early 2027. Conversely, if inflation unexpectedly rebounds, the probability of a third rate hike could be revised upwards. Investors should pay close attention to next week's final Eurozone CPI reading, the German ZEW economic sentiment index, and subsequent statements from the ECB president, as these will be key signals for market pricing. Overall, current monetary policy expectations have shifted from "the end of a tightening cycle" to "cautious observation," providing temporary support for Eurozone bonds and equities.

Editor's Summary : The significant downward revision of market expectations for ECB rate hikes highlights the dominant role of economic growth concerns in the path of monetary policy. The cumulative reduction of 57 basis points and the 30% probability of a third rate hike reflect the ECB's greater emphasis on policy flexibility in the current environment; the medium- to long-term interest rate trend will still depend on the evolution of economic data.