ECB Maintains Policy Flexibility Amid Middle East Tensions

The European Central Bank (ECB) policymakers have emphasized the importance of maintaining flexibility in policy options ahead of this week's policy decision. According to Jin10, market expectations have adjusted accordingly, with the probability of a rate hike currently at about 20%. However, this probability is expected to rise to approximately 63% by the June meeting. For the entire year, traders are pricing in about 58 basis points of rate hikes, roughly equivalent to two subsequent hikes of 25 basis points each, which aligns with Goldman Sachs' current baseline scenario. Goldman Sachs believes that due to unresolved Middle East tensions, the ECB is unlikely to take action this week, as policymakers wish to retain policy space while assessing the second-round effects of inflation. The tone of the upcoming press conference is expected to continue recent communications, with President Christine Lagarde likely to state that the Governing Council will monitor second-round effects and is prepared to act to ensure inflation returns to 2% in the medium term. Regarding future policy paths, Goldman Sachs forecasts that the ECB will implement two 25 basis point rate hikes in the coming months, first in June and then in September, raising the deposit rate to 2.50%.