ECB to press on with rate hikes as gas crisis intensifies

European gas prices have been on a rollercoaster ride over the past month, rising to a peak of €340/MWh before falling back to around €240 to leave them about 50% higher than at the time of the ECB’s last meeting. That has increased the risk of recession, and we have revised our GDP forecasts further below the consensus. (See Chart 1.) But it has also added to the price pressures facing the economy – higher gas prices will raise households’ energy bills, and pass through to higher food and core consumer prices. With inflation accelerating and broadening, a 75bp rate hike looks likely at the ECB’s meeting this week, followed by further aggressive increases at later meetings. We have pencilled in the Bank’s deposit rate to peak at 2% next year, but the risks are skewed towards it rising further than that.