ECB’s hawkish stance prompts calls for further rate hikes

The European Central Bank (ECB) has been aggressively raising borrowing costs in recent years to combat inflation. Goldman Sachs, Citigroup, and Barclays predict the ECB will tighten policy further due to rising energy prices and concerns over inflation returning to target. The central bank increased interest rates by 25 basis points as expected on Thursday, projecting inflation would stay above the 2% target for an extended period.

The ongoing Middle East conflict and heightened US-Iran tensions have driven crude prices above $100 a barrel, adding upward pressure on consumer prices. While Goldman Sachs, Citi, and Barclays anticipate another rate hike in December, Citi expects an additional increase in March 2027. If inflation persists, the risks of it becoming endogenous grow, according to Citi economists.

The ECB has raised borrowing costs aggressively over the years in an effort to curb inflation, although officials stress policy decisions will depend on data. The central bank meets again on October 29. Barclays highlighted the ECB's rate hike as a "no-brainer," emphasizing policymakers' continued focus on taming inflation, which they expect not to return to target until late 2027.

Goldman Sachs predicts a December rate hike will push rates into mildly restrictive territory. Traders now price in a 93.9% chance of a quarter-point rate hike from the ECB in December, as per LSEG data. The focus is also shifting to upcoming Federal Reserve and Bank of Japan meetings next week, which could contribute to the global tightening trend if policymakers signal higher rates for longer.