Is the ECB headed for a third hike?

Economist Greg Fuzesi of JPMorgan expects the European Central Bank (ECB) to raise interest rates for a third time in December, bringing the policy rate to 2.75%, following a prior 2.5% increase at their upcoming meeting. This forecast reflects the impact of sustained energy price pressures, robust growth, persistent core inflation, and an ECB neutral rate they anticipate rising.

While markets are speculating a potential fourth hike after December, Fuzesi clarifies this outlook is beyond their base case prediction. The ECB's analysis of the Middle East conflict has influenced their stance, becoming increasingly hawkish as the crisis persists and more dovish when tensions ease. Fuzesi notes energy supply shocks are generally considered favorable for the ECB, as any growth slowdown is mitigated by the energy shock.

Moreover, actual economic growth has exceeded expectations, which Fuzesi believes reduces the risks and costs associated with raising interest rates. Despite a slowdown in core inflation compared to initial forecasts, it has not decreased as anticipated, attributed to energy crises, technological price inflation, and persistent wage growth.

The ECB's approach has evolved; while their June hike was tested against a milder scenario, July's minutes indicate future adjustments may not face the same stringent criteria. Two ECB Governing Council members have hinted that the neutral rate estimate might rise to 2.25%-2.5%, suggesting that a single hike in December would still keep the policy rate in a relatively accommodative range.

A fourth hike could potentially occur as early as March, contingent on developments such as a resolution of the Middle East conflict, a more stable gas market post-winter, and wage data aligning with ECB targets. JPMorgan projects the policy rate to remain at 2.75% throughout 2027, with any reductions deferred until 2028.