ECB Hike Next Week Expected, But Further Rises Unlikely

Economists believe the European Central Bank (ECB) will raise interest rates next week, but not beyond that, according to a recent survey. The overwhelming majority of respondents expect the deposit rate to increase by a quarter-point to 2.5 percent on Thursday and stay there through 2027.

However, traders are pricing about three more hikes by mid-next year, highlighting a divergence between market expectations and economists' predictions. This discrepancy is attributed to the ongoing conflict in the Middle East, which has jolted energy markets again, causing oil prices to head back toward US$100 a barrel.

The ECB's challenge lies in calibrating monetary policy as inflation remains elevated but not entrenched. Despite this, risks abound, and policymakers are cautious about preventing second-round effects early on. Executive Board member Isabel Schnabel emphasized the importance of taking action to prevent such effects, while Austrian Governing Council member Martin Kocher noted that it will become clearer in the coming months if any materialized.

Economists foresee an upward revision to the ECB's growth projection for 2026, with the medium-term outlook set to be confirmed. However, achieving this outcome hinges on how the situation in the Middle East evolves, particularly regarding control of the Strait of Hormuz. The waterway has become a crucial factor in the ECB's future decisions, as a prolonged disruption could turn an energy-price shock into a broader inflation problem.