ECB vindicates trader bets on no more rate cuts with upbeat economic view

By Yoruk Bahceli and Stefano Rebaudo

Dec 18 (Reuters) -

The European Central Bank cemented market expectations that it has finished cutting rates on Thursday, as it raised its inflation forecasts for this year and next, but traders stopped short of boosting their bets on the timing of the first rate hike.

ECB chief Christine Lagarde stressed that the outlook remained highly uncertain and the bank would keep its options open.

The ECB kept its key

rate on hold

at 2% for a fourth straight meeting and Lagarde stuck to the message that policy remains in a "good place".

The bank now forecasts inflation at 1.9% in 2026, up from 1.7% previously.

While its 2027 inflation forecast was lowered slightly, the ECB's first projection for 2028 showed it returning to the 2% target. Growth forecasts were also revised up.

That all weakened the argument that the ECB may need to cut rates if an inflation undershoot it expects deepens down the line.

"The doves' last hope for a cut was the forecasts showing inflation would undershoot in the years ahead. That won't work anymore," said Arne Petimezas, director of research at Dutch broker AFS Group.

Thursday's moves cemented a sharp turnaround in trader expectations that gained momentum last week after hawkish policymaker

Isabel Schnabel

said the bank's next move may be a hike.

At the start of December, traders had seen a cut next year, not a hike, as the tail risk.

As Lagarde spoke, traders initially raised their bets on a rate hike being the next move to briefly price in more than a 50% chance of an increase by March 2027. This move partially unwound later to show around a 30% chance of a rate rise, roughly what it was prior to the ECB decision.

Lagarde said policymakers discussed neither a hike nor a cut on Thursday, adding the degree of uncertainty meant the bank couldn't provide forward policy guidance.

Divyang Shah, strategist at LSEG's IFR Markets, said those comments had come as "important pushback" against Schnabel's comments that had boosted rate hike bets.

U.S. economic data also helped push down Treasury yields, which are correlated with their euro zone counterparts, following the ECB's decision.

Germany's 10-year yield, the benchmark for the bloc, briefly touched 2.895%, its highest since March, when Berlin's decision to increase spending on defence and infrastructure sent borrowing costs surging.

Its 30-year yield briefly touched its highest since 2011 at 3.51%.

(Reporting by Yoruk Bahceli and Stefano Rebaudo, additional reporting by Danilo Masoni; editing by Alexandra Hudson and Amanda Cooper)