The European Central Bank raised its deposit rate by 25 basis points to 2.5% on Thursday, citing persistent inflation pressure from the Middle East energy shock. Staff projections now show inflation running above target further into the forecast horizon, even as growth estimates were revised up. Investors and economists remain split on how many more hikes the ECB will deliver.
The European Central Bank raised its key deposit rate by 25 basis points to 2.5% from 2.25% on Thursday, a move that was fully priced in by markets beforehand. The Governing Council said the outlook remains highly uncertain, with risks to the upside for inflation and to the downside for economic growth.
Inflation projections push further above target
Eurozone inflation hit 3.3% in August, with energy inflation surging to 14.3% as the euro zone's energy imports were squeezed by the Middle East conflict. The ECB's new staff projections left headline inflation for 2026 unchanged at 3.0%, but raised the 2027 forecast from 2.3% to 2.5% and the 2028 forecast from 2.0% to 2.1%.
Core inflation was also revised up for 2027, from 2.5% to 2.6%, and for 2028, from 2.2% to 2.3%. According to ActionForex, "well above target for an extended period" is how the ECB described the inflation outlook.
Growth outlook strengthens despite the shock
The ECB's 2026 GDP forecast was raised from 0.8% to 0.9%, while the 2027 projection moved up from 1.2% to 1.4% and the 2028 estimate held at 1.5%. Policymakers attributed the upgrades to the greater than expected resilience of the euro area economy, leaving a less stagflationary mix than in June's projections. Government borrowing costs have also risen, with euro zone bond yields hitting multi-decade highs as the conflict pushed investors to price in more tightening.
Economists split on how many hikes remain
Ed Hutchings, head of rates at Aviva Investors, said more hikes are likely coming, adding that with two hikes already delivered and more than a further two priced in, things may well have gone too far. Patrick Ernst of JP Morgan Private Bank said the door remains open to further tightening, while Felix Feather of Aberdeen said he expects another hike at the ECB's December meeting. A Deutsche Bank survey of clients found no consensus on where Thursday's move sits in the cycle: more than a third expect a peak of 2.75%, one in four expect rates to hold at 2.5%, and another quarter see a 3% terminal rate.
The ECB first delivered a rate hike in June, becoming the first major central bank to tighten in response to the war, then held steady at its following meeting. The Governing Council said it will continue deciding meeting by meeting rather than commit to a fixed path.
Sources: CNBC, ActionForex
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