It is hard to make sense of market expectations of ECB policy. As the chart below shows, markets are pricing in a gradual increase in interest rates of 0.75% in total this year, with hikes of 0.25% expected in June, September and December. Interest rates are then expected to remain at 2.75% through the first part of 2027. This pricing makes little sense to me. One can imagine two interpretations of these expectations. One is that markets expect inflation to rise modestly and then stabilise and drift back toward target. Another is that markets believe the ECB will repeatedly underestimate inflation pressures and be ... (full story)