December hike indicated by gradual European Central Bank tightening – Rabobank

2.50% is Rabobank’s forecast for the European Central Bank (ECB) deposit rate in October. Bas van Geffen expects policy to remain unchanged at that meeting, followed by a final rate rise in December. While inflation risks remain tilted to the upside, he sees no evidence of broad-based second-round effects. With financial conditions tighter and growth resilient, the case favours a slower, more measured pace of tightening.

December hike risk on a gradual rate path

"We expect the ECB to hold policy unchanged, leaving the deposit rate at 2.50%."

"The ECB’s tightening cycle may not be over, but the next rate hike will probably not materialise this month. Inflation risks are still to the upside, but they have not meaningfully increased. And tighter financial conditions amplify the ECB’s rate hikes somewhat."

"There is no compelling reason to accelerate the pace of hikes. There is no evidence yet that inflation is becoming more broad-based and entrenched, although some policymakers will argue that the ECB cannot wait for clear evidence of second-round effects, because they would have to intervene more strongly after these dynamics start."

"Therefore, developments in financial markets both allow and require the ECB to take some additional time to evaluate its next steps. We don’t think that the recent tightening of financial conditions is strong enough to prevent another rate hike. However, market pricing of three more hikes still seems aggressive – not in the least part because favourable base effects should lessen energy inflation in early 2027."

"So far, the ECB has managed the inflation and growth risks of the energy shock well. They tightened proactively, but gradually. The persistence of inflation risks implies that the ECB maintains this trajectory, and we believe that the next (and final) step will follow in December."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)