Markets pricing in around 50 pct chance of ECB rate hike by Jan 2018

German Finance Minister Wolfgang Schaeuble in its latest speech called on the bank to unwind ‘ultra-expansionary policy’ in 2017. While the bloc’s inflation quickened to a three-year high of 1.1 percent y/y in December 2016, Germany’s gauge accelerated to 1.7 percent y/y. Bundesbank cautioned that inflation could reach 2 percent in January 2017, given the firm growth momentum.

ECB President Mario Draghi at the central bank's January meeting repeatedly pointed out that he and his colleagues were particularly keen to ensure that the rise in inflation was “sustainable”. Without a rise in core inflation from current levels just below 1 percent the ECB will have to stick to its ultra-expansionary monetary policy.

Meanwhile, forward Eonia bank-to-bank rates dated for the ECB meeting on Jan. 25, 2018 have risen to around minus 0.30 percent, some 5 basis points above the overnight rate of minus 0.35 percent. According to analysts this gap suggests markets are pricing in around a 50 percent chance of a 10 basis point hike in the ECB's minus 0.40 percent deposit rate by next January.