Standard Chartered sees ECB rate hike in December as inflation outlook hardens

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Standard Chartered ECB rate hike call

Highlights

Standard Chartered now expects the ECB to raise its deposit rate by 25 basis points to 2.75% in December, shifting from a no-change forecast.
Euro zone September inflation surprised to the upside, driven by higher energy prices and resilient business activity, prompting forecasts of tighter ECB policy.
Money markets currently price a 65% probability of a 25 basis point ECB rate hike in December, according to LSEG data.

Forecast shift after inflation surprise

As reported by Reuters, Standard Chartered now expects the European Central Bank to raise its deposit rate by 25 basis points to 2.75% in December, after previously forecasting no change.

The brokerage says it changed its view after September inflation in the euro zone accelerated more than expected, largely because of higher energy prices. Recent business activity figures also suggest the economy is holding up better than previously anticipated, strengthening the case for another rate increase.

In a note, the bank's economists say the ECB is likely to take rates slightly into restrictive territory. They add that policymakers may want added protection against the risk that higher energy prices feed into wages and broader price pressures, even though signs of second-round inflation effects remain limited.

Market expectations and policy timing

The ECB next meets on October 29, but Standard Chartered says a December move is more likely because policymakers will then have updated economic projections and another round of inflation data.

Several major central banks, including the ECB, raised rates last month as officials sought to contain inflation risks linked to energy costs and resilient growth. Major Wall Street banks are also broadly converging around expectations for another ECB increase in December.

Money markets are pricing in about a 65% probability of a 25 basis point ECB rate hike in December, according to LSEG data. That pricing indicates investors increasingly see further tightening as a live possibility for the euro zone before year-end.

We previously reported on the September jump in euro zone inflation, which accelerated as higher fuel and natural gas prices pushed consumer prices above expectations. The article explained that while core inflation remained comparatively contained, the upside surprise kept the debate over further ECB tightening open, with markets still pricing additional hikes despite near-term uncertainty.

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