Economist: European Central Bank will raise interest rates by 25 basis points next week and then stop tightening

According to Zhitong Finance APP, economists expect the European Central Bank (ECB) to implement the second and final rate hike of this tightening cycle on September 10, after which it will halt further action. Surveys show that the vast majority of economists anticipate the ECB will raise the deposit facility rate by 25 basis points to 2.5% next Thursday and maintain this level until 2027. Compared to current rate futures, which are pricing in about three more hikes before mid-next year, economists hold a much more dovish view.

Economists expect the ECB to hike rates just once more

If the ECB, as economists expect, stops taking action after a September hike, this tightening cycle would include only two rate increases in total, making it the shortest since 2011. This scenario is quite reminiscent of the 2011 episode when the ECB also delivered two consecutive hikes amid surging oil prices, a tightening many policymakers later considered a policy mistake.

Now, with inflation once again driven by higher energy prices, stopping after a September hike would signal a much more restrained ECB response to supply-side shocks, aiming to avoid excessive tightening and reduce the risk of a hard economic landing—a consideration that may become even more important for policy formulation.

At present, a 25 basis-point rate hike next week by the ECB is largely expected by the market. Persistently high headline inflation, with market consensus for it to remain above 3% this year, makes it difficult for most policymakers to publicly oppose another hike. The renewed escalation of conflict in the Middle East has again rocked energy markets—with international oil prices nearing $100 per barrel and natural gas prices surging to their highest since 2023. Although elevated inflation has not yet shown signs of becoming entrenched, risks permeate the landscape.

Meanwhile, the eurozone economy has recently demonstrated unexpected resilience. On one hand, some Asian competitors have suffered greater impact from the blockage of the Strait of Hormuz, prompting some order and supply chain flows to shift to Europe. On the other hand, ongoing fiscal stimulus in multiple countries continues to support growth momentum.

As a result, next week's ECB rate hike is widely seen as a "precautionary hike"—primarily aimed at further strengthening the central bank's inflation-fighting credibility and effectively preventing energy price shocks from translating into indirect or second-round effects through wage negotiations and pricing behaviors.

Ken Egan, Managing Director at Kroll Bond Rating Agency Europe, commented: "The ECB will likely describe the 25 basis-point hike as a necessary step. However, it is unlikely to provide further forward guidance for more rate hikes, but will instead continue to emphasize data dependence, anchored inflation expectations, wage growth remaining under control, and the need to assess the extent to which previous tightening has transmitted into the economy."

Data shows that eurozone inflation rose to 3.3% in August, further above the ECB's 2% target, providing justification for the September rate hike. However, surveys indicate that most economists believe the current rise in energy prices will not evolve into broader inflationary pressures, which is a major reason markets are betting the tightening will stop after September. Virtually none of the surveyed economists could provide evidence that businesses and consumers are bracing for much stronger future price pressures, and most express only mild concern about knock-on effects, including those involving wages.

While ECB policymakers broadly agree that inflation, though at a three-year high, has not yet changed medium- to long-term expectations nor affected workers' pay levels, this could still change in the future.

Isabel Schnabel, a member of the ECB Executive Board, stated that it is "crucial" to prevent such second-round effects before stronger policy response is needed. Governing Council member Martin Kazaks said it will become "clearer" in the coming months whether such effects are taking hold.

Some ECB council members have already started to consider this issue in advance. Gediminas Šimkus said a hike next week "would not be enough." Dimitar Radev also noted that both September and December remain "meetings where action is possible," which could see borrowing costs rise further.

Ulrike Kastens, Senior Economist at DWS International, said: "The ECB is unlikely to signal further rate hikes in the coming months. However, we still see the risks for the next policy move as being tilted to the upside, with further hikes looking more likely than cuts."

Another rate hike would push the deposit rate to levels more likely to restrict economic activity. More than three-quarters of survey respondents believe that even at 2.5%, rates would be slightly above neutral. So far, the European economy has proven resilient enough to withstand a more tightening monetary environment. Economic output rose more than expected in the second quarter, and business surveys indicate ongoing robustness in economic momentum.

ECB expected to confirm medium-term economic outlook

Additionally, economists expect the ECB to raise its 2026 growth forecast, confirm its medium-term economic outlook, and reaffirm the inflation outlook. Realizing this vision depends on developments in the Middle East. With the U.S. and Iran battling for control of the Strait of Hormuz once again, the war that has lasted over half a year may drag on even longer.

Dennis Shen, lecturer at the Berlin Institute of Technology’s School of International Management, stated that this waterway “has already become a key variable influencing future ECB decisions, because if the disruption persists for too long, the energy price shock will morph into a broader inflation problem.” He added: “The ECB can dismiss a temporary energy shock, but it cannot ignore a sustained one.”