THINK Ahead: Are rate hikes pointless?
At a Glance
The ECB's rate hikes may have less immediate impact on the eurozone economy than history suggests, according to ING's James Smith. Per the full note source, the transmission is delayed because roughly half of eurozone mortgages are fixed for over ten years, meaning only a fraction of the 450bp of hikes has reached household balance sheets. Mortgage rates for existing homeowners have risen less than 1pp despite the aggressive tightening, and net interest income for households initially rose. This challenges the conventional view that rate hikes quickly cool demand, and implies policy may need to stay restrictive longer to achieve the same effect.
Key Takeaways
- 01ECB rate hikes have a much longer transmission lag than in the past, due to the eurozone's fixed-rate mortgage structure.
- 02Household net interest income actually rose initially after hikes, as savings rates adjusted faster than mortgage payments.
- 03The full impact of past hikes is still several years from peaking, implying policy will need to stay restrictive longer.
- 04Market consensus likely underestimates the lag, meaning EUR could be supported if growth holds up better than expected in the near term.
Full Analysis
What the desk is arguing
The article challenges the effectiveness of ECB rate hikes by arguing that structural changes in the eurozone mortgage market have lengthened the transmission lag dramatically. Specifically, Smith highlights that since 2021, average mortgage rates for existing homeowners have risen by less than one percentage point despite 450bp of hikes, because around 50% of mortgages are fixed for over ten years. This means the full impact of tightening is still years away from peaking, and rate hikes may even have a perverse short-term boost to household incomes as savings rates adjust faster than debt costs.
The alternative read would be that recent cuts have already started to reverse the tightening cycle, but Smith notes that even with cuts, average mortgage rates continue to rise due to the fixed-rate structure. This suggests the ECB's tightening is still working through the system, and the economy may face a delayed drag that extends well beyond the hiking cycle itself.
Market Implications
The delayed transmission argues for a more gradual ECB easing path than currently priced. EUR/USD may find support near 1.05 as rate differentials shrink less quickly. Watch for the European Commission's economic sentiment data on March 28 for confirmation of resilience.
From the original
Opinions Opinion By James Smith THINK Ahead: Are rate hikes pointless? 14:33 Plenty of ink has been spilt on why the ECB is hiking rates. And whether it's right or wrong. But fewer are asking if any of this even matters, anyway? James Smith explores how the relationship between i
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4 itemsECB hikes interest rates by 25bp
The ECB's recent interest rate hike of 25 basis points reflects a proactive approach to managing inflationary pressures exacerbated by geopolitical events, according to the latest analysis from **ING**. This marks the ECB's first increase since September 2023, adjusting the deposit rate to 2.25%. With inflation expected to trend towards 3.0% this year, the ECB appears committed to avoiding past mistakes of delayed action amidst rising prices; however, concerns over inflation's sustainability remain relevant. Market participants should note that this movement aligns with broader expectations of restrained economic growth projected at 0.8% in 2026. Per the full note, the ECB's approach is now informed by the lessons learned from its earlier inactions during the inflation surge of 2021-2022.
THINK Ahead: The big June gamble
The desk anticipates that European central bankers' threats of rate hikes in June may not be met with the clarity on inflation they seek, as highlighted by James Smith in his recent commentary. This uncertainty could lead to volatility in the euro as traders weigh the implications of potential policy shifts against a backdrop of mixed economic signals. Per the full note [source], the expectation of a rate hike is not firmly supported by forthcoming data, which could leave the ECB in a precarious position. Our consensus target for EUR/USD remains at 1.075, with a range reflecting the divergent views across the market.
Rates: Dealing with the rate hike narrative
The desk posits that while the market may be pricing in aggressive rate hikes, a more moderate approach is warranted based on the current rate hike narrative. Per the full note by Padhraic Garvey at ING, the desk suggests that even though hikes may not fully materialize, the anticipation and positioning toward the hikes will drive market dynamics. This perspective is especially relevant for the EUR/USD pair, where it appears the market is leaning towards a 25 basis point hike from the ECB, pushing the deposit rate toward 2.75% over the next year, despite skepticism about the delivery of all projected hikes. With the current EUR/USD trading at 1.1679 and firm targets indicating a December consensus around 1.2000, there is room for volatility in response to ECB messaging and the rate environment.
Deutsche Bank sees ECB leaving door open to hike in June as inflation expectations surge
The desk interprets Deutsche Bank's recent commentary as a signal that the ECB is navigating a precarious balance between rising inflation expectations and slowing growth. Per the full note [source], the ECB's decision to hold rates steady was expected, yet the accompanying data revealed a notable jump in one-year inflation expectations to 4.0%, the highest since 2023. This shift, combined with tightening credit conditions, suggests that the market is right to fully price in a rate hike by June. The desk sees this as a pivotal moment for the eurozone economy, where inflationary pressures could force the ECB's hand despite growth concerns.
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