A few weeks ago, traders were pricing in a significantly more aggressive ECB tightening cycle. Now, they’ve cooled off. Money markets currently reflect roughly 40 basis points of total European Central Bank rate increases for 2026, a meaningful pullback from earlier projections that had, at one point, exceeded 75 basis points.
What’s behind the shift
The ECB’s deposit facility rate currently sits at 2.00%. If the central bank delivers the widely expected 25 basis point hike at its June 11 meeting, that rate would climb to 2.25%, marking the first increase since September 2023.
Market-implied probabilities for that June hike range between 91% and 97%.
Earlier this year, surging energy prices driven by geopolitical instability, particularly tensions involving Iran and associated supply disruptions, had traders betting on a much steeper rate path. At peak anxiety, markets were pricing in more than three rate hikes for the year. Reports of ceasefire progress in the Iran conflict appear to have deflated some of the more aggressive positioning, bringing total expected hikes down from more than 75 basis points to roughly 40.
