Market expectations of further interest rate hikes by the European Central Bank this year have begun to impact the Eurozone's financing environment. Many economists believe that even before the central bank takes formal action, tightening credit standards and rising financing costs have already suppressed demand, making the ECB's decision on whether to raise interest rates further more complex.

Market expectations tightened ahead of time

In her latest analysis, Goldman Sachs economist Alexandre Stott stated that the transmission of austerity policies has already begun. For the Eurozone, bank loans account for a large proportion of corporate financing, so changes in bank lending standards will have a faster impact on the real economy.

He pointed out that the current tightening effect largely stems from market expectations of rising policy rates, rather than from the actual implementation of all rate hikes. This means that if the ECB wants to continue suppressing demand and curbing inflation, it still needs to realize some of the rate hike expectations already priced in by the market.

However, Goldman Sachs also noted that about a quarter of the economic drag did not stem directly from monetary policy expectations, but rather from external factors. This, to some extent, reduces the necessity for the European Central Bank to significantly tighten policy and supports a more cautious pace of interest rate hikes.

The June meeting has become the focus of attention.

The market widely expects the European Central Bank to raise its deposit facility rate by 25 basis points to 2.25% at its June meeting. Bets on another rate hike in September also remain.

This expectation is fueled by renewed increases in eurozone inflation. Driven by the energy shock triggered by the Iran-Iraq war, eurozone inflation rose to 3% in April, exceeding the European Central Bank's 2% target. The next inflation data release will be on June 2nd.

European Central Bank (ECB) officials have recently reiterated that they will make decisions based on data at each meeting. ECB Vice President Luis de Guindos stated that policymakers need to strike a balance between controlling inflation and avoiding excessive pressure on economic activity.

Weak growth exacerbates divisions

Market divisions remain significant regarding whether interest rate hikes should continue. Latest data shows that the Eurozone economy grew by only 0.1% in the first quarter, indicating continued weak growth momentum.

Berenberg's chief economist, Holger Schmieding, believes that major economies such as Germany, France, and Italy are being dragged down by rising energy costs, and the Eurozone faces a situation of rising inflation and slowing growth. He judges that the energy shock itself will compress other household consumption, thereby weakening demand, which may alleviate inflationary pressures to some extent.

Some argue that the European Central Bank cannot afford to hesitate at this juncture. Filippo Alloatti, head of credit finance at Federated Hermes, stated that the economic impact of disruptions to Middle Eastern energy infrastructure remains severe and difficult to assess. Even if the situation eases, oil prices are likely to remain high, with economies like Germany and Italy being particularly vulnerable.

He believes that failure to respond promptly to inflation and the second-round effect could undermine market confidence in the ECB's ability to maintain price stability. Therefore, he supports a 25 basis point rate hike as early as June.