ECB rate hike odds rise as SocGen flags sticky inflation risks

Societe Generale warns that an ECB rate hike may become increasingly likely as Eurozone inflation risks stay elevated. Markets now price roughly a 40% probability of at least one ECB rate hike before September 2025, up from about 15% three months earlier. Key inflation signals include core inflation above the ECB’s 2% target and particularly persistent services inflation. Wage growth accelerated to an average of 4.2% in 2024 (from 3.8% prior year). Services inflation has remained above 4% for eight consecutive months, while business and consumer inflation expectations show a gradual upward drift. Headline inflation is cited around 3.1% and is complicated by volatile energy prices. SocGen highlights three policy risks: delayed responses could force a more aggressive tightening later; persistent inflation can erode purchasing power and weaken investment sentiment; and diverging inflation paths across member states can make a single ECB move harder. Transmission channels could include higher credit costs, a stronger euro impacting exports, repricing of asset prices, and potential hit to business/consumer confidence. Regional divergence is also notable: Germany near 2.8%, Spain about 3.9%, and Slovakia above 5%. Beyond inflation control, the ECB must weigh financial stability—banks adapted to low rates, while highly indebted governments/corporates may face higher refinancing risk. Bottom line for traders: ECB rate hike expectations appear to be rising, setting up volatility around ECB communication and Eurozone data as markets reassess the policy path through 2025–2026.