ECB Rate Hike Almost Certain Tonight; Market Focuses on Future Policy Path and Lagarde's Tenure

According to Zhituo Finance APP, the European Central Bank (ECB) will announce its interest rate decision at 20:15 Beijing time on Thursday. The market widely expects the ECB to raise rates by 25 basis points, increasing the deposit facility rate from 2.25% to 2.50%. This will be the ECB's second rate hike since the Iran war pushed up energy prices. Currently, inflation is far above the target level, while the eurozone economy has performed surprisingly well.

Surveys show that all but one analyst believe the ECB will raise the deposit rate by 25 basis points to 2.5% on Thursday. The new quarterly forecasts will reinforce the rationale for a rate hike: as eurozone economic growth accelerates, inflationary pressures will also increase.

Policymakers are struggling to handle last month's consumer price increase, which exceeded 3%, close to a three-year high, and is unlikely to drop significantly in the coming months. Unlike the Federal Reserve and the Bank of England, the ECB already raised rates in June, making another hike this week almost a foregone conclusion.

The focus is shifting to the future path of rate hikes. Markets expect two or more additional hikes, while economists remain skeptical. ECB officials are also divided: some believe further hikes may be necessary after this month, while others urge caution since there is no sign of a second-round inflation effect yet, and risks related to trade in the Middle East and the US remain.

"It is clear that the ECB will hike rates this week," said Goldman Sachs Chief European Economist Jari Stehn. "But there is significant uncertainty about the outlook, and some signs of division in the Governing Council, which means the future of interest rates is unclear."

The rate decision is set to be released at 2:45 pm Berlin time. ECB President Christine Lagarde will hold a press conference 30 minutes later.

2.5% may hit 'neutral rate ceiling', G7's most hawkish central bank faces internal divisions

ECB officials have widely signaled a September rate hike, solidifying the ECB's position as the most hawkish central bank among the Group of Seven.

However, subsequent actions are controversial. Lithuanian central bank governor Gediminas Simkus said raising rates to 2.5% is insufficient to bring inflation back to 2%, citing factors such as stronger economic growth. ECB Executive Board member Piero Cipollone warned that the ECB should not tighten monetary policy excessively for fear of harming the economy.

Part of the reason is that 2.5% is widely regarded as the upper limit of the neutral range, beyond which economic activity could be restricted. However, not everyone accepts this view. Gabriel Makhlouf from Ireland argues that only when rates exceed 2.75% will economic activity be constrained. Deutsche Bundesbank President Joachim Nagel said officials must also consider the recent rise in global bond yields, which "complicates things," though tighter financial conditions could help the ECB curb inflation.

Economists David Powell and Simona Delle Chiaie stated, "As the oil market becomes volatile again and gas prices soar, the hawks will undoubtedly push for another rate hike in December. However, the tightening of financial conditions and the limited indirect effects of the energy shock pose significant obstacles for them."

Economic outlook: Inflation expectations for next year to be revised up, and 2028 becomes 'verifier' for rate hikes

The new economic outlook is crucial to the ECB's Thursday meeting discussions and the future path of interest rates. Markets expect the ECB to once again release different forecast scenarios, as it did in March and June.

In the baseline scenario, analysts expect inflation expectations for next year to be revised up from 2.3% in June, 2026 inflation to remain at 3%, and anticipate a stronger economic expansion.

"Unless the forecast for 2028 is below the target, especially for core inflation and inflation excluding energy, this will confirm expectations for slightly more than three rate hikes," said JPMorgan economist Greg Fuzesi in a report.

However, the ECB officials' forecasts may already be outdated. Since the deadline was in August, this outlook may not reflect the recent surge in bond yields or higher energy prices.

Lagarde's future: Rising speculation over early departure

Speculation is rising about Lagarde leaving the ECB early. Her comments after the July rate meeting suggested she would not remain until her term ends in October 2027.

Media reports last month said the World Economic Forum, famous for its annual meeting in Davos, is still inviting her to take over, and Lagarde seems ready to accept the position.

Lagarde has also recently refused to rule out participating in French politics, saying, "Whatever role I play, as long as it allows me to make the greatest impact." Shortly after her trip to Berlin, she will attend the annual political gathering organized by Hervé Morin, President of the Normandy region and leader of the centrist party, as an honored guest.

If ECB Executive Board member Isabel Schnabel leaves early, Lagarde may be under more pressure to clarify her future. Schnabel's term runs until December 2027, but reports suggest she may move to the International Monetary Fund.