UBS now expects the European Central Bank to deliver one more rate hike in March 2027, after raising its eurozone inflation outlook. The bank still expects the ECB to hold rates at its October 29 meeting and to hike in December.
UBS now expects an additional ECB rate hike in March 2027, after revising its eurozone inflation outlook higher. The bank projects price growth to peak at 4% or above in early 2027.
UBS expects a hold in October and a hike in December
Economists led by Reinhard Cluse firmly expect the ECB to leave its deposit rate unchanged at 2.5% at the October 29 meeting. They still expect a 25-basis-point hike to 2.75% in December, a move they previously thought would mark the peak.
The economists see no reason for the ECB to accelerate its pace, noting the central bank hiked gradually in June and September based on updated staff forecasts. Market pricing for an October move has fallen to just 2-3 basis points, down from 12.5 basis points a month ago.
Higher inflation drives the March call
September inflation came in higher than expected at 3.8% year-over-year. UBS now expects it to peak at 4% in January 2027.
Against that backdrop, the bank sees an additional 25-basis-point hike to 3% in the first quarter of 2027. It favors March 18 as the likely date, though a February 4 move is possible. UBS expects rate cuts to begin in the first quarter of 2028, bringing the deposit rate back to 2.25%, its estimate of neutral, by the third quarter of that year.
Risks run in both directions
According to UBS, the risks to the new call are two-sided. Rates could peak earlier at 2.75% if tensions in France or tighter financial conditions via higher bond yields prompt the ECB to stop sooner. Alternatively, a re-escalation of Middle East tensions pushing energy prices higher could lead the ECB to hike by more than forecast.
Market pricing currently points to a peak of 3.15%, above UBS's own projection.
The economists also said a quick, pre-emptive activation of the ECB's Transmission Protection Instrument to support French bond markets appears unlikely. They are skeptical the ECB will halt quantitative tightening to ease pressure on French bonds, noting the TPI and OMT remain its preferred tools for stress in individual sovereign bond markets.
Source: Investing.com
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