Europe | ECB hikes, December looms larger

The ECB delivered the expected 25bp hike, taking the deposit facility rate to 2.50%. The decision was unanimous and Lagarde described it as a “no-brainer”, reflecting continued inflationary pressures from the conflict in the Middle East, with inflation expected to remain well above target for an extended period. She also stressed that the move is robust across all three updated staff scenarios.

What comes next is much less clear. Lagarde said the Governing Council focused entirely on today’s decision and did not discuss either the future rate path or the likelihood of further hikes. The message therefore remains unchanged. Decisions will continue to be taken meeting by meeting, based on incoming data, with no pre-set path or forward guidance.

At 2.50%, the deposit rate is now around the upper end of the ECB’s estimated neutral range. Even so, Lagarde played down the relevance of that threshold, describing neutral as a continuously evolving and “highly conceptual” range that is especially difficult to pin down in an economy repeatedly hit by shocks. In practice, this suggests that 2.50% should not be seen as a hard ceiling.

The new staff projections remain relatively upbeat on growth, particularly for 2027, reflecting stronger-than-expected resilience and broad-based momentum across countries and sectors despite the failed truce. Defence, infrastructure and AI-related activity continue to provide support. Still, in our view, a prolonged conflict could increasingly weigh on household consumption, which remains one of the strengths highlighted by the ECB.

The inflation outlook is less positive. The new projections keep inflation above target for longer, with a return to around 2% only towards the end of 2028. The baseline already incorporates a gradual pass-through from higher energy prices into core and food inflation, but still assumes relatively limited indirect and second-round effects overall. So far, those effects remain contained. Wages show no material response to the energy shock, while food inflation surprised to the downside, something Lagarde linked partly to milder weather earlier in the year.

Overall, the ECB delivered what markets had largely priced in after the latest growth and inflation data and recent comments from key Governing Council members. More importantly, the new projections leave room for further tightening. Growth remains relatively resilient, while inflation stays above 2% well into 2028. We now expect another 25bp hike towards the end of the year, taking the deposit rate to 2.75%. Risks around the energy outlook remain clearly tilted to the upside, with the ECB’s alternative scenarios reinforcing the possibility of a stronger inflation path if the conflict drags on.