ECB rate hike likely, but analysts disagree on what comes next

An interest rate increase of 25 basis points from the ECB today is widely expected, which would lift the deposit facility rate to 2.50%. Unless there is a major surprise, the actual decision is not the main focus for markets.

The key question is what happens after this move.

Oil prices have climbed back to $100 and bond yields are rising, sparking a debate about whether the expected rate increase will be the last in the current cycle. That makes ECB President Christine Lagarde's guidance the central point of attention.

Prior to the decision, several major banks and analysts have outlined their expectations for the ECB.

Lagarde is not expected to give a clear signal to markets.

Analysts largely concur that Lagarde will avoid committing to further rate increases.

According to Barclays, Lagarde will frame the September increase as an adequate response to current inflation risks, but will not call it an 'insurance hike'. This approach would give the ECB ample flexibility if inflation pressures intensify later.

Danske Bank shares that outlook, predicting Lagarde will repeat the ECB's meeting-by-meeting and data-dependent stance without offering explicit forward guidance.

JP Morgan also foresees minimal explicit guidance, but suggests the ECB's updated staff forecasts might communicate the message. The bank believes these projections will likely argue for more tightening.

"The ECB is unlikely to give explicit forward guidance beyond this, sticking to its meeting-by-meeting and data-dependent approach. There will, however, be a lot of what Lagarde has called “framework guidance”, especially via the staff forecasts. This is likely to show a clear case for raising rates further."

Barclays and Danske maintain that 2.50% will be the highest rate.

That flexibility does not guarantee another rate hike.

Barclays still predicts the ECB will hold rates steady after September, with the deposit rate staying at 2.50% until the end of 2027.

However, Barclays does note that the outlook could shift due to recent energy market changes, specifically 'the rise in gas prices and the persistence of exceptionally high crack spreads'. This might lead the ECB to consider that 'a more restrictive policy stance may ultimately be required'.

For now, that is a risk and not the base case.

Danske Bank contends that there has been limited evidence of energy price spillovers into broader inflation in the region. Without such second-round effects, they see little reason for the ECB to move rates significantly into restrictive territory.

"We believe the lack of spillovers from energy to non-energy inflation means the ECB need not enter restrictive territory. We thus expect the ECB to keep the deposit rate at 2.50% from September in both 2026 and 2027."

Deutsche Bank, JP Morgan and Societe Generale anticipate another rate increase.

As the meeting approaches, the hawkish voices are becoming more prominent.

Deutsche Bank now forecasts a further 25 basis point increase in December, bringing the deposit facility rate to 2.75%. But the bank is skeptical that rates need to go as high as markets currently price in.

"3.00% rates or higher are difficult to justify when there is no evidence of second- round effects, little evidence of indirect effects, and headline HICP still expected to be back on target from late 2027. These could change, of course. The market- implied terminal rate (3.00-3.10%) reflects the rise in energy prices. But energy prices are unlikely to stay here. Or, if they do, growth is likely to be weaker."

JP Morgan has also revised its view to expect a December rate hike, with rates staying at that level through 2027.

However, JP Morgan does not exclude a further hike in March next year, and now expects the ECB to start easing policy only in 2028.

Societe Generale similarly expects a 25 basis point hike in December, arguing that the ECB will want to stay ahead of inflation risks. For next year, the bank is less definitive, stating that 'further hikes in 2027 will depend on the data in the autumn'.