The odds of a 25 bps rate hike are seen at ~36% as of today, with traders not entirely convinced of there being no rate hike. But also not enough to think that the likelihood of a rate hike being rather considerable. As much as I want to decipher the numbers, I would argue that the decision right now looks to be rather 50-50 at worst/best depending on how you want to view it.
The rates pricing hasn't changed all too much in the past week, which indicates that traders are also just as much confused about what the ECB is going to do next week:
The main conundrum for the ECB is that policymakers fear they may still need to do more in the fight against inflation but another rate hike could also mean overdoing it, if they are not careful.
The euro area economy is already taking a measurable downturn with Q2 conditions, as it turns out, wasn't as great as expected.
Adding to that is a plunge in loan demand and a potential credit crunch looming. We're not quite there yet but all signs are pointing to much tighter credit and financial conditions and another rate hike will not help in this regard whatsoever.
And if they do not hike, they may have just missed their final window to really convince markets that overall conditions are suitable enough to push that narrative.
I mean, if economic conditions worsen significantly further in the months ahead, then trying to sell the story of another rate hike becomes that much tougher. And it would look desperate while at the same time, rubbing salt onto the deepening wound in the euro area economy.
It's a real dilemma at the moment. And I would not be surprised to see a more split call by ECB policymakers during and after the meeting this time around. It is a tricky one to price in and markets are definitely attesting to that with the sort of probability implied in the OIS market as seen above.
