European Central Bank: One more hike then pause – Rabobank
Rabobank strategists Bas van Geffen and Elwin de Groot expect the European Central Bank (ECB) to raise the deposit facility rate by 25bp to 2.75% in December, driven by higher energy price forecasts. They argue the ECB will not accelerate tightening, see upside risks if inflation broadens, but stress that energy inflation should ease from March, limiting further hikes and making any additional moves largely transitory.
Energy shock drives December tightening
"Our new energy price forecasts make another rate hike more likely than not. We now expect the ECB to raise the deposit facility rate by 25bp in December, to 2.75%. This is not a shift to a stronger policy response."
"So, on balance, we believe that this additional energy shock hits inflation harder and earlier than economic activity. So, logically, some further tightening may be required to keep expectations anchored, and to prevent second round effects. We therefore pencil in an additional rate hike in December."
"Considering that energy prices should start to abate in March, we believe policymakers won’t need to keep up that appearance for much longer. Thus, we forecast just one additional hike."
"The longer high energy prices persist, the greater the risks that such second-round effects could take hold. But that’s precisely what the previous two hikes and a December follow-up seek to mitigate. As long as data and surveys do not indicate that second-round effects may materialise, the ECB need not respond more forcefully."
"We therefore consider any deposit facility rate increases above the current 2.50% to be temporary. The ECB will probably revert these in the second half of 2027. That’s another reason why we haven’t factored in a March hike yet: monetary policy famously works with long and variable lags, so the ECB will probably be looking beyond the tail-end of the energy-driven inflation spike by then."
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