Economists Agree With ECB’s Schnabel That Next Move Will Be Hike
JustinEconomists predict the next shift in European Central Bank interest rates will be up, aligning with the views of investors and influential Executive Board member Isabel Schnabel as inflation settles around 2%.
Economists predict the next shift in European Central Bank interest rates will be up, aligning with the views of investors and influential Executive Board member Isabel Schnabel as inflation settles around 2%.
More than 60% of respondents in a Bloomberg survey say officials are more likely to raise borrowing costs than lower them — a meaningful change from October, when only a third shared that outlook.
It's not something they expect to happen anytime soon, however: The deposit rate is seen remaining at 2% on Dec. 18 and throughout the next two years.
Analysts are revising their forecasts after inflation stabilized and the euro zone's economy weathered global trade stress and geopolitical upheaval surprisingly well.
In an interview, Schnabel cited such resilience — and rosier prospects, helped by a glut of government spending — among reasons why she's "rather comfortable" with wagers for rates to rise next. One gauge points to a first increase in the latter half of 2027.
Most Governing Council members say simply that rates are in a "good place" for the time being. For President Christine Lagarde, the task will be to reflect their confidence that dangers to the economy are waning without encouraging the idea that hikes are getting close, according to Jan von Gerich, chief strategist at Nordea. That's an opinion shared by others.
"The biggest challenge is one of communication, particularly against a backdrop of rapidly-evolving market expectations," said Paul Hollingsworth, chief European economist at BNP Paribas.
Hollingsworth and von Gerich both forecast quarter-point hikes in September and December 2027. Were traders to bet on more rapid action, tighter financing conditions would pose a headwind for the economy — just as it's expected to pick up.
Indeed, survey respondents reckon next week's new quarterly projections from the ECB will paint a brighter picture for growth — something Lagarde herself has also suggested.
On inflation, concerns linger about 2027, when a holdup in the European Union's new carbon-pricing system could weigh. Most economists, though, expect a September forecast for prices to rise 1.9% that year to be maintained.
Eyes will then shift to 2028 — the first time it will feature in the outlook. The poll indicates a figure just above the ECB's 2% goal, leaving almost two-thirds of analysts more worried about an overshoot of the medium-term target than an undershoot.
Even those who think price pressures will be materially weaker in three years don't consider them soft enough alone to trigger another decrease in borrowing costs.
"The ECB should feel rates are properly set at present as inflation risks are comparatively balanced," Scope economist Dennis Shen said. "We don't expect any rate reductions in 2026, but the ECB will keep its options open."
One reason to remain flexible, according to Shen, is the potential for more US cuts next year. The Federal Reserve eased for a third straight meeting this week and may lower once more in 2026. Kevin Hassett, the frontrunner to replace Chair Jerome Powell, sees "plenty of room" for more substantial moves, however.
US policy — monetary as well as trade — is still deemed the most acute threat to the euro area, with the war in Ukraine remaining a big concern.
Against that backdrop, Swedbank's Chief Economist Nerijus Maciulis foresees one more cut by the ECB in March, arguing that bullishness on the region's growth prospects "rests on flimsy foundations."
"Unless we are talking about hiking down the well-trodden scenic Alpine paths, Governing Council members are unlikely to hike any time soon," he said.
About 45% of respondents, though, say economic growth is predominantly restrained by structural forces beyond the ECB's control. These include sluggish manufacturing amid stiffer competition from China, costly energy and excessive bureaucracy.
Nearly half say those hurdles are just as strong as cyclical drags, illustrating why policymakers are expected to show patience before considering more rate cuts — even if growth and inflation disappoint.
"Monetary policy can't solve structural growth problems," said ING's Carsten Brzeski, who sees officials standing pat at least through 2027. "A 25 basis-point rate cut by the ECB won't make the German automotive industry more competitive vis-a-vis China."
