ECB's hawkish stance and rising energy prices prompt expectations of further rate hikes
TLT•Next policy meetings in focus
The ECB has increasingly emphasised that future policy decisions will be data-dependent. Policymakers are due to meet on October 29.
Attention is also turning to next week's much-anticipated Federal Reserve and Bank of Japan meetings for signals on whether interest rates could stay higher for longer.
Wall Street banks expect more ECB hikes
Wall Street banks Goldman Sachs and Citigroup, alongside Barclays, expect the European Central Bank to raise interest rates further after Thursday's hawkish policy decision reinforced concerns that inflation could remain elevated for longer.
The central bank raised interest rates by 25 basis points, as expected, and projected that inflation would remain above its 2% target for an extended period.
Energy prices and inflation outlook keep pressure on policymakers
Renewed hostilities between the United States and Iran have pushed crude prices above $100 a barrel, worsening the inflation outlook for the euro zone and reinforcing expectations that policymakers may need to keep monetary policy restrictive for longer.
While Goldman Sachs, Citi and Barclays expect the ECB to raise rates again in December, Citi anticipates an additional hike in March 2027. Traders are pricing in a 94% chance of a quarter-point rate hike in December, according to LSEG data.
"The longer inflation remains high, the more pronounced the risks that it becomes endogenous," Citi economists said.
Swiss investment bank UBS, through its Global Research and Global Wealth Management divisions, also expects the ECB to hike rates in December, although UBS Global Research sees the move being reversed later, with rates returning to 2.5% by the fourth quarter of 2027.
