ECB to raise rates a second time in September, but then done, say economists: Reuters poll

By Indradip Ghosh

BENGALURU, Sept 3 (Reuters) – The European Central Bank will raise interest rates on September 10 for the second and final time in what would be its shortest hiking campaign in 15 years, according to a Reuters poll published on Thursday.

Most economists in the survey say energy price rises are not likely to trigger broad inflation pressures.

While war in the Middle East has heated up again in the last few days and global bond yields have risen sharply over the past week, forecasters who watch the central bank have held to their views the ECB will be disinclined to add further pressure on a fragile economy. 

“We still find it hard to see, amid public finance woes and surging bond yields, that the ECB would really be willing to add more fuel to the fire,” said Carsten Brzeski, global head of macro at ING, who expects a September quarter-point rise but no more after that.

“In other words, it’s difficult to envisage the ECB being willing to risk a recession to tackle what is still a textbook supply-side shock,” he said.

Euro zone inflation accelerated to 3.3% in August, drifting further above the ECB’s 2% target but driven largely by energy costs, reinforcing the case for a September rate increase.

FEW PREDICT FURTHER MOVE 

But economists aren’t convinced the ECB will need to move again, in contrast to interest rate futures contracts which are pricing in a third move. 

All 65 economists in the August 31 to September 3 Reuters survey predicted the ECB would lift its deposit rate by a quarter-point to 2.50% next week, up from 83% in an August poll and 72% before the July policy meeting, when they held rates. The ECB last raised rates in June.

About 91% of economists predict the deposit rate will end this year at 2.50%, while 78% see it staying there through the middle of next year, higher than 80% and 63%, respectively, last month.

“When it comes to beyond September, the reason why they will stop hiking is we still think inflation will approach target during the course of next year,” said Pia Fromlet, euro area economist at SEB. 

“However, there is an upside risk to our inflation forecast.”

If the survey predictions are correct, this will be the ECB’s shortest rate hiking campaign since 2011 when it raised rates twice in response to sharply rising oil prices, moves many policymakers now regard as a policy mistake.

Economists raised their 2026 inflation forecasts six times this year to 2.9%, the highest upward revisions in a year since 2022.

That was when the ECB joined global peers in launching its most aggressive tightening campaign in decades to combat record inflation fuelled in part by Russia’s invasion of Ukraine.

IRAN WAR IN FOCUS

Forecasts for this quarter and next were revised to 3.2% and 3.3% from 3.0% and 3.2% last month. Inflation was not expected to return to the ECB’s 2% target until late 2027, with core price pressures expected to firm over the next few quarters.

For now, ECB policymakers have little appetite to signal further tightening after September, partly due to well-anchored long-term inflation expectations, several sources told Reuters recently, similar to the poll results. 

However it might not take much to change that, especially if the war in Iran drags on or intensifies.

“High diesel, gasoline and food prices are very visible to consumers. If those pressures continue, short-term consumer inflation expectations will likely move up again. And then there is a risk of wage slippage,” said Alain Durre, chief Europe economist at Natixis.

The economy was forecast to grow 0.8% this year and 1.2% in 2027.

(Other stories from the Reuters global economic poll)

(Reporting by Indradip Ghosh; Polling by Debrah Gomes and Shaloo Shrivastava; Editing by Ross Finley and Jan Harvey)