European Central Bank: Why gradual tightening signals a December rate hike – Rabobank

Tighter financial conditions and resilient growth favour a more measured pace of rate increases, according to Rabobank’s Bas van Geffen. He expects the European Central Bank (ECB) to leave policy unchanged at its October meeting, keeping the deposit rate at 2.50%, before delivering a final hike in December. While upside risks to inflation persist, he sees no evidence of broad-based second-round effects.

Will a gradual rate path bring a final hike in December?

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

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"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.)