UBS Sees ECB Hiking Again to 2.75% by Year-End

UBS has revised its forecast for the European Central Bank (ECB), expecting another rate hike in December to bring the deposit rate to 2.75%. The Swiss bank's economists led by Reinhard Cluse had previously predicted a peak of 2.5%, but now see an additional 25 basis-point increase.

The ECB raised its deposit rate by 25 basis points to 2.5% on Wednesday, in line with market expectations. UBS notes that the updated macroeconomic projections show stronger inflation and growth outlooks than initially anticipated, despite incorporating higher policy rates and bond yields.

ECB President Christine Lagarde described the rate hike as a 'no-brainer,' emphasizing its justification under all scenarios. The bank's forecasts for 2027 now include 2.5% inflation, up from 2.3%, and 1.4% GDP growth, an increase of 0.2 percentage points.

However, UBS economists remain cautious about the risk of second-round effects through higher wage growth, citing 'significant uncertainty arising from developments in the Middle East.' They expect the ECB to pause at its next meeting on October 29 before hiking again in December.