JPMorgan now expects the European Central Bank to deliver a third rate hike this cycle, lifting the policy rate to 2.75% in December after a near-certain second hike to 2.5% next week. BNP Paribas has reversed its earlier call and now expects the same December move, citing persistent energy risks and sticky inflation.
JPMorgan expects the European Central Bank to raise rates for a third time in December, taking the policy rate to 2.75%, economist Greg Fuzesi said, following a near-certain second hike to 2.5% at next week's meeting. Markets are now largely pricing in a fourth hike after that, though Fuzesi said this remains outside JPMorgan's base case.
Energy and growth reshape the outlook
Fuzesi said the December call reflects an interaction between persistent energy price pressures, solid growth, sticky core inflation, and a neutral rate the ECB sees edging higher. The Governing Council has tracked the Middle East conflict closely, he said, turning less hawkish whenever the crisis appeared to de-escalate and more hawkish when it didn't. He added that the odds of a durable de-escalation by December have progressively receded, and European natural gas prices are likely to stay elevated through winter.
Growth has also surprised to the upside relative to JPMorgan's pre-war forecast, which already anticipated above-potential euro area growth this year. Core inflation, meanwhile, has not moderated as much as expected, a trend Fuzesi tied partly to tech prices and persistent wage growth rather than the energy crisis alone.
BNP Paribas joins the shift
J.P. Morgan and BNP Paribas both said this week they now expect another 25-basis-point hike in December, reversing calls that had the tightening cycle ending without a December move. According to BNP Paribas: "the persistence of the energy shock and the resilience of the economy" make second-round inflation effects more likely.
Markets have almost fully priced in a 25-basis-point hike at the September 10 meeting, indicating a 99.2% probability, according to LSEG data. Oil prices eased but remained above $95 a barrel, while eurozone bond yields retreated from multiyear highs reached after the escalating conflict in Iran pushed energy prices higher.
A fourth hike now in view for March
At least two Governing Council members have recently signaled the neutral rate estimate could be moving up toward the 2.25%-2.5% range, Fuzesi said, up from the roughly 2% level ECB staff had previously used. That shift means only a third hike in December would put the policy rate into mildly restrictive territory. JPMorgan now expects the policy rate to hold at 2.75% throughout 2027, with any rate cut pushed back to 2028.
A fourth hike could come as soon as March, Fuzesi said, though a Middle East de-escalation, a gas market emerging from winter, and wage data nearing target-consistent levels could complicate that debate.
Sources: Investing.com, Investing.com
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