ABN AMRO economists Bill Diviney and Jan-Paul van de Kerke say the ECB is likely to respond to a renewed energy shock with further monetary tightening aimed at limiting second-round inflation effects. Their base case includes two ECB rate rises over the coming months, as wage growth returns to levels consistent with the 2% target. They expect fiscal support to remain limited because the hit to real incomes is expected to be smaller than before. They also cite tighter public finances, concern about bond market reactions, and the risk that broad support could add to second-round inflation.

Three Ts Approach

ECB President Christine Lagarde has urged governments to apply the “Three Ts” approach to any measures: Temporary, Targeted, and Tailored. The economists link this guidance to the aim of avoiding broad-based support that could add to inflation pressures. They state that higher interest rates cannot replace energy supplies lost due to conflict. They add that rate rises can help keep inflation expectations anchored while wages move back towards the 2% target. The European Central Bank appears set to raise rates in response to the recent energy shock, even though it won’t solve the underlying supply issue. We just saw preliminary February 2026 inflation data jump back up to 3.1%, largely reversing the cooling trend we witnessed throughout 2025. The ECB’s primary concern now is preventing this price spike from becoming embedded in wage expectations. Unlike the broad fiscal support packages we saw governments roll out during the energy crisis of 2022, we expect a much more muted response this time. Governments are more fiscally constrained and are actively trying to avoid fueling the very inflation the ECB is fighting. This leaves monetary policy as the main tool to anchor the economy.

Rates Market Implications

For us in the rates market, this signals that the forward curve for €STR likely hasn’t fully priced in the ECB’s resolve. We should anticipate at least two rate hikes in the coming months, creating opportunities in short-term interest rate swaps. Positioning to pay a floating rate against receiving a fixed rate could prove profitable as the market adjusts to this new reality. This hawkish stance means German government bond prices are set to fall, pushing yields higher, especially at the short end of the curve. The German 2-year yield has already climbed 20 basis points this month to 2.95%, and we expect it to break above 3% shortly. Buying puts on Bobl or Schatz futures is a direct way to position for this move. The policy divergence should also provide a tailwind for the Euro, particularly against the US Dollar, as the Federal Reserve appears to be on a more cautious path. The EUR/USD exchange rate has already tested the 1.10 level, up from 1.08 just a few weeks ago. We see value in buying call options on the Euro to capitalize on potential further strength. This is a delicate moment, as wage growth had only just normalized to levels the ECB was comfortable with. After peaking near 4.5% in 2024, negotiated wage growth in the final quarter of 2025 finally eased to around 3%. The central bank is moving pre-emptively to ensure this new energy shock does not trigger a second round of inflationary wage demands. Create your live VT Markets account and start trading now.

Start trading now – Click here to create your real VT Markets account