Central Banks Shift to Hawkish Stance Amid Energy Price Shock

ING Think has updated its central bank views after recent meetings of the Federal Reserve and European Central Bank. The team now expects both banks to hike rates one more time before year-end, a change from their previous dovish expectations.

The shift in tone comes as both banks face a supply-side shock driven by surging energy prices, which have so far produced only limited knock-on effects across the broader economy.

Despite this, both the US and eurozone economies show an unexpected resilience, with economic growth remaining resilient despite the impact of higher oil prices. However, there are signs of consumer stress in the form of low savings rates and rising credit card and auto loan delinquencies, which could act as a brake on economic activity.

For the Fed, ING Think expects at least one more rate rise, with the possibility of further hikes contingent on energy prices remaining high. The team forecasts a peak of 4.25% followed by a prolonged pause, but notes that this is dependent on assumptions about Middle East de-escalation and improved energy flows.

The ECB's new hawkish tone was also evident in last week's meeting, with Christine Lagarde downplaying the concept of neutral interest rates and staff projections showing headline inflation only dropping below 2% in Q4 2027. While there are currently no signs of knock-on effects from higher energy prices, ING Think notes that this could change if oil prices remain high.