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Tougher ECB prompts banks and markets to raise interest rate bets again

Investment banks are upping the ante on rising eurozone interest rates in the coming months, a day after the European Central Bank (ECB) surprised markets with a tougher-than-expected stance on rising inflation.

Deutsche Bank now expects the ECB to make two 0.50 percentage point hikes this year, after starting the tightening cycle with a 0.25 point move in July.

Morgan Stanley said that following Thursday’s ECB meeting, it revised upwards the size of the tightening expected at the September meeting to 0.50 point, while adding a further 0.25 point increase.

The ECB ended a stimulus scheme and said next month it would make its first rate hike since 2011, followed by a potentially bigger move in September.

With inflation at a record 8.1% and still rising, the ECB now fears that price growth is expanding and could trigger a wage-price spiral, heralding a new era of higher prices.

While ECB President Christine Lagarde has already signaled a series of rate hikes in recent comments, the tone seen on Thursday caught markets by surprise.

Money market futures now indicate almost 1.50 points of ECB tightening by the end of the year, from 1.40 points shortly after the ECB’s statement and around 1.35 points on Wednesday.

Source: CNN Brasil

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