The euro gained over 1%, and government bonds collapsed following the ECB’s interest rate hike and the message that the trend would continue. On Wednesday, as widely expected, the ECB raised its deposit rate by a quarter-point to 3.50% and revised its inflation forecasts for the coming years.

Investors reacted by increasing their expectations of rate hikes, implying a probability of nearly 80% that the ECB would raise rates to 4% by October, compared to 50% before the decision. The ECB’s decision comes after the Federal Reserve kept its policy unchanged but signalled that further tightening was highly likely.

Eurozone officials also confirmed that they would stop reinvestments under their 3.2 trillion-euro asset purchase program starting next month, another tightening move.

The region’s energy deficit turned out to be less acute than expected. The economy’s resilience gives authorities greater leeway to increase rates, while new ECB projections suggest that inflation will moderate more slowly than previously thought.

It is too early for the ECB to end its mission of fighting inflation. Even after this week’s nailed increase, it will have raised interest rates by only 400 basis points, compared to 500 basis points for the Fed.

However, other factors could alter the current trend’s future. Economic expectations do not change the trajectory of the ECB, but the financial stability reviews it published on May 31st could. In the report’s foreword, Vice President Luis de Guindos highlighted the fragility of the euro area’s banking system. The potential issues do not necessarily come from banks in the bloc, which have overcome bankruptcies in the United States and Switzerland this year without much noise, but from how the sharp rise in interest rates could affect the rest of the financial sector.

Furthermore, due to monetary policy lags, its one-year rate hike cycle has yet to be fully felt in the eurozone economy. The ECB has suspended its massive bond purchases under quantitative easing and shifted to passive tightening mode by no longer reinvesting about half of the maturing debt.

Finally, and not the less, another element to be noticed is the political factor. Pressure on southern economies will continue to rise, particularly in Italy. A deeply divided council could struggle to reach an agreement and could push for a status quo.