Debate on the End Point of ECB Rate Hikes: Economists Expect It to End in December, While Markets Bet on Three More Increases

According to information from Zhihui Finance APP, economists expect that after holding steady next week, the European Central Bank (ECB) will implement its final rate hike of this cycle in December. This view stands in sharp contrast to the market's bets that several further rate hikes are yet to come.

The Final Rate Hike in December? Economists and Markets at Odds

Surveys show that the vast majority of respondents believe the ECB will raise the deposit rate by 25 basis points to 2.75% at its last meeting in 2026, and maintain that level until May 2028. In contrast, traders expect three more rate hikes over the next year.

The survey highlights a long-standing divergence: how much strength policymakers need to bring consumer price growth back to the 2% target. Although investors are closely watching the continued rise in oil prices, analysts point out that the secondary effects of inflation are still to fully manifest.

"There are still no signs that energy inflation is spreading to broader wages and price setting," said Bas van Geffen, an economist at Rabobank. "The ECB does not need to accelerate its rate hike cycle and can wait until December to act."

In response to the Iran war, the ECB raised rates twice, in June and September. Despite faster inflation reaching 3.8% last month, output has proven more resilient than most anticipated.

ECB officials hope to prevent energy shocks from becoming embedded in the economy and considered another rate hike this month. However, the likelihood of maintaining a quarterly pace of hikes remains higher, and new forecasts will be released at the December meeting.

The ECB's September outlook forecasts GDP growth of 0.9% this year and 1.4% in 2027, with consumer prices rising by 3% and 2.5% respectively. In an adverse scenario, inflation is expected to reach 3.1% and 3.2%.

As oil prices broke $110 per barrel, more than two-thirds of economists believe the eurozone’s economic performance is worse than the September baseline scenario.

"The longer overall inflation stays high, the harder it is to ignore the secondary effects on wages, prices, and expectations," said Dennis Shen, a lecturer at the Berlin School of Management. "For the ECB, the risk of inflation overshooting now represents a much larger medium-term risk than undershooting."

French Bond Yields Break 5%—Will the ECB Step In?

Besides the Middle East situation, policymakers are assessing how much the rise in bond yields has tightened financial conditions. ECB President Lagarde and others believe this will curb economic growth and limit the transmission of energy inflation.

With French benchmark bond yields touching 5% this week—the first time since 2002—some investors even see the risk of a new round of eurozone debt crisis. The market speculates just how bad things would need to get before the ECB would deploy its unused emergency tool—the Transmission Protection Instrument (TPI).

Economists believe the threshold is very high: 70% of respondents ruled out any form of intervention, and around 90% ruled out the TPI. The TPI is designed to address unwarranted, disorderly market dynamics that threaten policy transmission in the eurozone.

"The rise in bond yields can be well explained by increased global capital demand and deteriorating public finances in many countries," said Karsten Junius, chief economist at Bank J Safra Sarasin. "In such a scenario, it will be hard for the ECB to find a reason to use the TPI."

Some economists think the ECB might take less aggressive measures, such as verbal intervention, signaling dovish rate intentions, or stopping quantitative tightening.

"As long as France is unwilling to save itself, there is very little the ECB can do for France at the moment," said Carsten Brzeski, Global Head of Macro at ING. "With the bond market taking over the ECB’s job, the only thing the ECB can do is sound more dovish and try to dampen rate hike expectations."