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Rabobank’s Bas van Geffen anticipates the European Central Bank (ECB) maintaining its policy stance at its October meeting, with the deposit rate remaining at 2.50%. He expects the bank to introduce the final interest rate hike in December. Van Geffen points out persistent upside inflation risks, but there is currently no evidence of comprehensive second-round effects.

He argues that tighter financial conditions, combined with resilient growth, suggest a more gradual and measured hiking trajectory. The European Central Bank’s cycle of tightening may not be over, but the next rate increase will most likely not occur this month. Inflation risks are still to the upside, but they have not significantly increased. Tighter financial conditions augment the impact of interest rate hikes by the ECB.

There is no compelling reason to speed up the rate hikes; there is no indication that inflation is becoming more widespread and entrenched. Although some policymakers may argue that the ECB cannot wait for clear evidence of second-round effects, as they would need to intervene more aggressively once these dynamics begin. Consequently, developments in financial markets both permit and necessitate the ECB to take some additional time to assess its subsequent actions.

While the recent tightening of financial conditions is not strong enough to preclude another rate hike, market pricing of three more increases seems aggressive, primarily due to favorable base effects that should diminish energy inflation early in 2027.

So far, the ECB has effectively managed the inflation and growth risks associated with the energy shock, tightening proactively yet gradually. The persistence of inflation risks suggests that the ECB should continue this approach, and we believe the next (and final) step will take place in December.