According to media reports, European Central Bank officials broadly believe that, based on current data and the economic impact of the Middle East war, if the inflation situation does not improve, the ECB will raise rates by 25 basis points in December. Currently, market pricing puts the probability of a 25 basis point ECB rate hike in December at 85%.
Analysts note that although the ECB has left room for another rate hike in December, the Governing Council is laying the groundwork for ending this tightening cycle. If the inflation situation does not improve, the ECB will restart rate hikes in December — a signal that is driving market expectations for further monetary tightening this year increasingly higher.
Citing people familiar with the matter, Bloomberg reported that ECB officials broadly believe that, given current data and the economic impact of the Middle East war, an additional 25 basis point rate hike may be needed to curb inflation. The sources requested anonymity because the discussions are internal matters.
The market has already priced this in to some extent, with current trading showing roughly an 85% probability of another 25 basis point hike in December, and investors expecting the tightening cycle to extend into 2027, when at least one more move may occur.
On Hold This Week, but the Direction of Rate Hikes Is 'Clear'
The ECB kept its deposit rate unchanged at 2.5% this week, marking the third rate decision since the Iran war shocked energy markets and pushed inflation to nearly twice the 2% target. President Lagarde announced she will step down early, a development that somewhat overshadowed the focus of this decision itself, but she still made clear that the direction of interest rates is "clearly discernible."
Lagarde revealed that a rate hike plan was indeed discussed at this week's meeting before officials chose to hold steady. People familiar with the matter said this week's internal discussions were "extremely intense." The 2.5% deposit rate sits at the upper end of the range within which monetary policy is considered neutral for the economy.
Inflation Risks Skewed to the Upside, Economic Growth Under Pressure
On the inflation assessment, although Lagarde downplayed the risk of price pressures spilling beyond the energy sector, she simultaneously emphasized that upside risks remain the dominant tendency; by contrast, the risks facing economic growth point in the opposite direction — concerns that growth will fall short of expectations are mounting.
Data expected to be released on Friday is projected to show third-quarter economic growth slowing to 0.2% from 0.6% in the second quarter, although the second-quarter figure was significantly inflated by Ireland's standout performance. Meanwhile, consumer price growth is expected to accelerate from 3.8% to 3.9%.
Analysts: The Tightening Cycle May Be Nearing Its End
Bloomberg economists David Powell and Simona Delle Chiaie believe that "the Governing Council is laying the groundwork for ending this tightening cycle, even though the ECB has left room for another rate hike in December." The two analysts said Lagarde's recent remarks further reinforced their judgment — her comments placed more emphasis on limited signs of spillover effects from the energy shock and on the effects of tighter financial conditions.
People familiar with the matter also cautioned that no decision has been made yet and the situation could change rapidly, especially given the unpredictable developments in the Middle East.
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