Lagarde's Signals Key as ECB Eyes Second Rate Hike Since Conflict

The European Central Bank (ECB) is expected to raise interest rates by another 25 basis points this week, but markets are more focused on what ECB President Christine Lagarde signals about future rate hikes rather than the decision itself.

With a second 25bp hike already fully priced in, MUFG expects the euro and euro-zone rates to react more to updated policy guidance than the actual decision. The bank notes that markets have become significantly more hawkish over the summer, driven by renewed natural gas price surges since the US-Iran conflict began.

Eurozone growth accelerated to 0.4% quarter-on-quarter in Q2, and business confidence surveys have fully reversed their post-conflict declines. Markets now price around 75bps of additional ECB tightening by mid-2026, up from a more dovish outlook earlier in the summer.