European Central Bank Poised for More Rate Hikes Amid Inflation Concerns

Wall Street banks anticipate further interest rate hikes by the European Central Bank after a hawkish decision reinforced prolonged inflation concerns. The ECB raised rates by 25 basis points, expecting inflation above 2% for an extended period, while renewed US-Iran hostilities push crude prices higher, impacting the euro zone.

Wall Street banks, including Goldman Sachs, Citigroup, and Barclays, anticipate further interest rate hikes by the European Central Bank following a hawkish policy decision on Thursday that has heightened inflation concerns. The ECB has already raised interest rates by 25 basis points, projecting that inflation will remain above the 2% target for an extended period.

The escalation of tensions between the United States and Iran has driven crude oil prices above $100 per barrel, exacerbating inflation predictions for the euro zone. This development has reinforced expectations of a prolonged restrictive monetary policy stance. While Goldman Sachs, Citi, and Barclays foresee another rate hike in December, Citi is also predicting an additional increase in March 2027. According to data from LSEG, traders are currently pricing in a 94% chance of a quarter-point rate hike in December.

Citi economists warn that prolonged high inflation raises the risk of it becoming entrenched. Additionally, UBS also expects a December rate hike by the ECB, with a potential reversal leading to a 2.5% rate by late 2027. Barclays remarked on President Christine Lagarde's description of the recent rate increase as a ‘no-brainer,’ highlighting the ECB's focused effort to manage inflation, which is not projected to hit the 2% target before late 2027. Policymakers will convene again on October 29 amid anticipation for Federal Reserve and Bank of Japan meetings.