European Central Bank: September hike prospects strengthen – Nordea

Nordea’s Jan von Gerich argues that the European Central Bank remains focused on upside inflation risks and is likely to continue tightening policy. The report highlights data dependence but still forecasts three more rate increases, in September, December and March 2027, which would take the deposit rate to 3%. Energy prices and broader price pressures are key to the path of rates.

ECB focus stays on inflation risks

"The monetary policy account of the ECB’s July meeting further supports the notion that the ECB remains mainly concerned about upside inflation risks for now and that, unless the price outlook improves materially, rates will have to be raised again."

"For now, the absence of second-round effects gives the ECB room to monitor developments, which we think is broadly consistent with a quarterly pace of 25bp rate hikes rather than more rapid monetary policy tightening. That said, the situation could still become more acute, favouring a more pre-emptive approach and faster rate increases."

"It was argued that pre-emptive action could be justified if the situation turned sufficiently acute, as reflected in an unanchoring of inflation expectations, clear signs of a pick-up in underlying price pressures, or firms moving to a more rapid pace of price adjustment than usual."

"As a result, we continue to think the ECB will hike rates several more times at a quarterly pace, i.e. we see hikes in September, December and March 2027, which would bring the deposit rate to 3%. For now, risks are tilted towards fewer hikes."