ECB Signals More Waiting Than Tightening as Markets Scale Back Hike Expectations

A new market and expert survey points to growing conviction that the European Central Bank will hold policy steady rather than press for additional rate rises this year. Cooling inflation prints and softer activity indicators have weakened the immediate case for more tightening, prompting traders to pare back terminal rate expectations and sovereign yields to reflect a longer pause. The repricing is already visible in derivatives and bond markets, narrowing the window for surprise hawkish moves and easing short-term funding pressures across the euro area. The outlook is being read alongside other central-bank decisions and signals — including cautious pauses or delayed easing in some regional banks — which underline a broader shift toward data-dependence in policy making. A firmer euro (around $1.20 in recent moves) has also entered the equation, helping to blunt import-driven inflation but potentially weighing on export competitiveness and corporate dollar-reported revenues. For banks and corporates, a slower pace of funding-cost normalization provides immediate relief for liquidity but may compress net interest margins if policy remains less restrictive for longer. Investors have gravitated toward duration in core sovereigns and scaled back aggressive hawkish positions in euro assets; at the same time, demand for FX hedges and cross-asset rebalancing has risen amid changing risk premia. Policymakers face a trade-off: a pause reduces recession risk but erodes some of the tightness that helped re-anchor prices, meaning any return of inflationary momentum would require a convincing policy response. In this environment, forward guidance and conditionality are elevated tools for the ECB to manage expectations and preserve credibility. The survey does not rule out further tightening, but it establishes market consensus that any new move would need clear evidence of persistent inflationary pressures. Absent such signals, attention will increasingly turn to wage dynamics, energy prices and global spillovers — especially from the U.S. policy path — that will determine whether this pause is temporary or the start of a longer plateau in rates.