THINK Ahead: How markets are right – and wrong – about rate hikes
The desk posits that while financial markets are pricing in multiple rate hikes from major central banks, current inflation data suggests that these hikes may ultimately be unwarranted. Per the full note source, even with rising energy prices, essential indicators like service-sector pricing and wage growth remain stable or even subdued, indicating a divergence between market expectations and economic fundamentals. Our interpretation suggests that unless there is a marked shift in inflation data, particularly related to energy costs, market overpricing of rate hikes could lead to volatility. As of now, consensus positioning shows the market leaning toward heightened rate expectations, but the slowdown in inflationary pressures could challenge these views moving forward.
What the desk is arguing
The current narrative surrounding rate hikes by major central banks is increasingly rooted in speculative fears rather than tangible economic indicators. According to James Smith's analysis, there is scant evidence that current energy price increases are translating into broader inflation trends, suggesting that the market may be mispricing future rate moves.
Crucial data points, such as wage expectations from the Bank of England, show a decline, further supporting the argument for a cautious approach by central banks. Lagarde also emphasizes that the ECB is not witnessing the anticipated spillover effects from energy prices, which aligns with our view that the environment today is markedly different from 2022.
Where it sits in our coverage
Our consensus target for EUR/USD stands at 1.075, with a range between 1.04 and 1.12. Notably, firms such as JPMorgan project a target of 1.10 for March 2026, while Bank of America sets a lower target of 1.04 for the same period. This suggests that while the desk's perspective aligns more closely with the upper range of market valuations, there's a significant divergence within the consensus.
How other firms see it
A group of firms, including jpmorgan, are aligned with the desk's view, emphasizing stability in inflation as a reason to temper expectations for aggressive rate hikes. Conversely, firms like bofa foresee a necessity for stronger monetary action, suggesting different market interpretations of economic indicators and inflation trajectories.
As investors recalibrate based on evolving economic signals, the EUR/USD trajectory will be particularly sensitive to developments in the ECB's monetary policy stance and the path of U.S. interest rates.
01Rate hikes are being priced in despite stabilizing inflation metrics, indicating market disconnect.
02Current inflation indicators, including service pricing and wage growth, do not support aggressive rate hike expectations.
03Divergence in market forecasts highlights uncertainty in the anticipated monetary policy path.
04Upward pressure on energy prices could lead to volatility if economic indicators fail to show a corresponding rise in inflation.
Market implications
Traders should remain alert for shifts in economic data, particularly service-sector pricing trends, as any indication of rising inflation could validate market rate hike expectations. A break above 1.08 in the EUR/USD could signal a shift in sentiment towards more aggressive monetary policy ahead of upcoming central bank meetings.
Risks to this view
The central narrative could be invalidated if inflation metrics suddenly accelerate, particularly driven by energy prices, prompting a more aggressive stance from central banks. Additionally, unexpected geopolitical developments could exacerbate inflation concerns, leading to a reassessment of market positioning around rate hikes.
Opinions Opinion by James Smith THINK Ahead: How markets are right – and wrong – about rate hikes Published 10:32 United States Markets are pricing several rate hikes from the major central banks despite scant evidence that the energy crisis is seeping into broader inflation. Yet James Smith argues investors are right to worry about higher oil and gas prices, even if in the end, officials are more likely to underdeliver. Plus: our guide to a packed calendar of data and events How markets are right – and wrong – about rate hikes Here’s a question: Why are the central banks even thinking about hiking rates?
You'd be forgiven for wondering after European Central Bank President Christine Lagarde insisted this week that policymakers aren't seeing higher energy prices spill over into broader inflation or wages. "Believe me, we are really scrutinising," she said. "But we are not seeing it." And she’s right. Service-sector pricing plans look broadly unchanged. Wage growth expectations in the UK have actually fallen since February, according to Bank of England surveys.
Bert Colijn explains in the video below how it’s a similar story across Europe. Then there’s food inflation which is easing – despite being an obvious place for higher oil and fertiliser prices to show up. Falling producer and farm-gate prices suggest that will continue.
True, this will all take time to play out. But then this was never 2022 all over again. Labour markets are cooler.
Fiscal policy is less supportive. The backdrop is much less conducive to a catastrophic inflation wave. And so far, that is exactly what the data is telling us.
So why then are September rate hikes so nailed on in financial markets for the ECB and the Federal Reserve? Eurozone selling price expectations haven't budged in the service sector Source: Macrobond, ING "> Source: Macrobond, ING The answer is that markets aren't focused on today's inflation data. They're focused on what might happen if the energy crisis worsens.
And worsen, it might. When I asked our energy guru Warren Patterson in our webinar what it would take for oil prices to go back to $120/bbl – his answer was “not much”. It could happen if the Strait of Hormuz stays blocked through August and if Red Sea shipping comes under greater threat, he argued.
And if you look at the price of oil we actually use, we’re already well above the highs seen earlier this year. Diesel prices have surged. The spread between gasoil and Brent crude is a whopping 70 dollars.
That’s eclipsed both the April highs and what we saw in 2022. There are, of course, mitigating factors when it comes to oil more broadly. Chinese crude imports remain well down and there’s little sign of that changing.
Further releases from the US Strategic Petroleum Reserve are possible. But more worryingly for Europe, natural gas prices are reaching fresh 2026 highs, too. Gas, don’t forget, is particularly important because too often, it sets the marginal price of electricity across the continent.
Until now, this has been an oil and not natural gas crisis – in sharp contrast to 2022. But gas storage levels are worryingly low and Europe is having to compete with Asia for scarce Liquified Natural Gas (LNG) supplies. Warren warns that prices could go higher from here.
Markets are pricing multiple rate hikes from the major central banks Source: Macrobond, ING "> Source: Macrobond, ING That's ultimately what worries central banks. It’s not that current energy prices justify higher interest rates. Officials, at least in Europe, can live with inflation of 3–3.5% if it’s short-lived – and here in the UK, that’s where we’re headed even with the latest price rises.
It’s that policymakers have to set interest rates based on risks. If the probability of dramatically higher energy prices has risen, then so too has the risk of it spilling into wages and persistently elevated inflation. It’s why the ECB is likely to hike rates in September.
It’s why the hawks at the Bank of England will keep pushing for higher rates next week, even if a hike is very unlikely this month. And it’s why Fed Chair Kevin Warsh worries about five years of above-target inflation becoming six or seven. Investors think this way too.
Many might agree with us that the ECB need only hike once more as things stand; 55% of our live webinar audience said so this week. But market expectations are really a weighted average of different scenarios for interest rates, not a point estimate. Speak to any rates trader, and they will tell you how painful it has been trying to bet against rate hike expectations over recent months.
Yet that comment from Lagarde this week on second-round effects shouldn’t be taken lightly. It is a subtle but important hint that the case for rate hikes beyond September is not yet clear-cut. And unless this crisis really does get much worse, our view is that central banks are likely to underdeliver on what markets are now pricing.
Speaking of which, do join me for the second episode of our summer webinar series on 6 August, where I’ll be quizzing our US expert James Knightley on how the Fed could avoid rate hikes entirely. And if you can’t wait until then, check out his video this week explaining why the inflation outlook might be about to get a lot better. James Smith Bert Colijn: How surging oil prices could impact inflation ING's Bert Colijn tells James Smith about the inflationary impact so far, and the risks ahead.
THINK Ahead in developed markets United States (James Knightley) Rate Decision (Wed): While sharply higher oil prices have seen Fed rate hike expectations build in the market over the past week, the fact that June’s inflation prints were significantly lower than predicted, and the jobs numbers were softer than hoped, means that we expect the Fed to leave policy unchanged at this meeting. The Fed’s position shifted at the June FOMC meeting, with the committee split nine vs nine on whether they expected to raise interest rates at some point this year, and we expect the tone of the press conference to retain a hawkish edge. That said, Chair Kevin Warsh is not keen on forward guidance, so it is doubtful we will see the market deviating from its expectations of a 25bp rate hike at the September FOMC meeting after Wednesday’s decision.
While we believe underlying price pressures are easing thanks to cooling housing costs, weaker wage growth and tariff refunds improving corporate cash flow, we will need to see a return to dialogue in the Middle East and a de-escalation that prompts a reversal in energy prices in order to shift market pricing. GDP (Thu): In terms of data, the 2Q GDP report will be the highlight. Consumer spending is expected to post a modest recovery and tech investment remains robust, but that comes at a cost of significant imports, meaning trade will remain a drag.
We expect annualised growth of 2.5% versus the consensus 2.3% and the lates Atlanta Fed GDP Now tracking rate of 1.7%. We will also get the core PCE deflator measure of inflation, which will be hotter than the 0% month-on-month core CPI print. We expect to see it come in somewhere between 0.1% and 0.2%, likely rounding to the higher end.
Portfolio management fees, airline fare measurement and a larger healthcare weighting and lower housing weighting explain the more elevated core PCE deflator print relative to CPI. United Kingdom (James Smith) Rate decision (Thur): The Bank of England is set to keep rates on hold, but will a growing number of officials back rate hikes? It's possible that Catherine Mann joins Huw Pill and Megan Greene in pushing for higher rates, though our base case is another 7-2 vote to keep policy unchanged.
Rising energy prices are a risk, but for now we expect new forecasts to show inflation peaking well below 4%. So long as that remains the case, we think the Bank can keep rates on hold this year. THINK Ahead in Central and Eastern Europe Poland (Adam Antoniak) Jul Flash CPI (Fri): Renewed conflict in the Middle East, with the US launching a series of strikes on Iranian targets, pushed Brent crude oil price back towards $100/bbl.
At the same time, Poland’s measures shielding retail gasoline and diesel prices (lower excise duty, VAT, and administrative cap price) expired at the end of June. As a result, we see a sharp spike in fuel prices at the pumps that has pushed headline inflation back to around 3% year-on-year in June. Upward pressure on CPI inflation was slightly mitigated by a negative contribution from household energy prices due to a high reference base (electricity prices went up in July 2025, but not in July 2026).
Hungary (Peter Virovacz) GDP (Thu): We are heading towards a significant positive surprise for GDP, at least compared to our view two or three months ago. While none of the high-frequency data available alone suggests a booming economy, taken together it still adds up to something significant. According to our nowcast indicator, GDP growth could exceed 1% on a quarterly basis and reach 2.4% year-on-year.
These kinds of growth figures were last seen during the post-Covid recovery. The services sector has probably thrived again, and on top of that, we expect industry and pre-election government spending to boost economic activity. This estimate represents a significant revision to our previous estimates, which showed a slowdown after the strong first quarter.
However, the nowcast measure calls for an acceleration. Therefore, we are probably heading towards a substantial upward revision to our 2026 GDP outlook of 1.5%, potentially reaching 2.5% if our call for the second quarter is accurate. Czech Republic (David Havrlant) GDP (Thu): The real GDP quarterly dynamic likely strengthened in 2Q26, while annual expansion remained just above 2%.
That said, the reading may be muddied by the impact of the Middle Eastern turmoil, as firms on both the import and export side tried to stock up before prices rose and to shield themselves against supply-chain issues. This may also result in a rather significant contribution of changes to inventories that are hard to estimate. CIS (Dmitry Dolgin) Uzbekistan policy rate (Wed) .
We expect the Central Bank of Uzbekistan (CBRU) to keep the policy rate on hold at 14.00% as a base case scenario, as the recovery in CPI from 5.5% YoY in May to 6.5% YoY in June supports the CBRU’s scepticism about the origins of the disinflationary trend that were expressed by the Bank at the last meeting . We reiterate, however, that the fiscal consolidation, recent exchange rate resilience and high real interest rates create room for easing in monetary policy in the medium to long-term. Further softening in the signal is highly likely, and even an actual cut could not be excluded as a more aggressive alternative scenario.
Azerbaijan refinancing rate (Fri) . We expect the Central Bank of Azerbaijan (CBRA) to keep the rates on hold at 6.50% as CPI at 5.8% YoY as of June is still within the 4±2% target range. Meanwhile, as Azerbaijan has elevated exposure to secondary inflationary risks through active trade with China, the EU, and the Middle East regions, we would not exclude that, depending on the further CPI trajectory, the CBRA might consider hikes in the medium term.
Key events in developed markets Source: Refinitiv, ING "> Source: Refinitiv, ING Key events in Central and Eastern Europe Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download In this opinion How markets are right – and wrong – about rate hikes THINK Ahead in developed markets THINK Ahead in Central and Eastern Europe Author James Smith Developed Markets Economist, UK James is a developed market economist, responsible for ING's view on the UK economy and Bank of England.
He graduated from the University of Bath with a degree in economics and joined ING in 2015.