Where Does the ECB’s Rate Hike Cycle End? A Growing Divide Between Economists and Markets
The European Central Bank's next moves are under intense scrutiny as inflation persists. A clear divergence has emerged between the expectations of professional economists and the bets placed by financial market participants.
The Consensus View: A Final Hike in December
A recent survey of economists reveals a strong consensus: the ECB is likely to pause its rate increases at next week's meeting, then deliver one final hike in December to conclude this tightening cycle.
The median forecast points to a 25-basis-point increase in the key deposit rate this December, bringing it to 2.75%. Crucially, economists expect rates to remain at this peak for an extended period. The survey suggests this level could hold steady until at least May 2028, implying a prolonged plateau.
Market Pricing: More Work to Be Done
In contrast to the economists' "one-and-done" outlook, current market pricing tells a more hawkish story. Traders in interest rate derivatives markets are pricing in the possibility of up to three additional rate hikes over the coming year. This reflects deeper-seated concerns about the stickiness of inflation.
This gap underscores the significant uncertainty in assessing the persistence of price pressures against a backdrop of slowing growth and volatile energy costs.
The Analytical Rationale: Room for Patience
Economists advocating for the December finale point to specific data trends. Bas van Geffen, senior economist at Rabobank, highlighted a key observation supporting a measured approach.
The central argument is that while energy prices surged, there is not yet clear evidence that this shock has broadly and persistently filtered through into wage demands and broader price-setting for goods and services. These contained "second-round effects" provide the ECB with space to wait for more information.
"The ECB can afford to wait until December, when it will have more data and insights into wage negotiations, before making its final move," van Geffen noted. This meeting-by-meeting, data-dependent strategy is seen as a prudent way to balance the fight against inflation with risks to economic growth.
The outcome of this debate over the terminal rate will have significant implications for credit conditions, the economic outlook, and asset prices across the Eurozone.