The European Central Bank is expected to hold its deposit rate at 2.50% this month but raise it by 25 basis points in December as inflation runs nearly double its 2% target, a Reuters poll found. Most economists polled had until recently thought the ECB was done.
Global government bond yields have climbed sharply over the past weeks, reflecting higher inflation expectations and fiscal worries. In Europe, investors have focused particularly on France.
Caught between high inflation — at 3.8% in September and very close to the ECB’s latest worst-case scenario — and concerns that rising yields could hurt growth, policymakers have recently argued for what ECB President Christine Lagarde called a “measured response”.
So far there has been scant evidence that higher energy prices caused by the US-Israeli war with Iran are spilling into other consumer prices, which would be a trigger for more ECB rate rises.
All but three of 73 economists polled October 5-8 expected the ECB to hold its 2.50% deposit rate on October 29, matching market pricing. The central bank raised rates for a second time this year in September.
However, a near-90% majority of economists, 64 of 73, now see another hike in December. This marks a clear reversal from the over 90% expecting rates on hold in last month’s survey.
“Given uncertainties, the ECB is likely to remain on the current quarterly adjustment path and that should get us to another hike in December… the main risk is there may actually be one more hike, maybe in March,” said Jens Eisenschmidt, chief Europe economist at Morgan Stanley.
A 58% majority, 40 of 70, saw the deposit rate peaking at 2.75%. But over a third, 24, expect it to be 3.00%, up from just two last month. Markets are currently pricing nearly three hikes by end-2027.
“I do not have a very strong conviction they go to 2.75% and stay there,” said Eisenschmidt.
“Our forecast is predicated on oil prices not increasing more and activity not accelerating further from here,” he said.
