Markets are pricing in at least two more European Central Bank interest rate hikes even with the sharp drop-off in oil prices and the improving inflationary outlook.
ECB officials are expected to increase the deposit rate by a quarter-point to 2.75 per cent at their final monetary-policy meeting of 2026. This will push interest rates to the top of a range that is deemed to be neutral (neither stoking nor restricting economic activity).
Franfurt has raised borrowing costs twice since the conflict in the Middle East pushed energy prices sharply higher.
With inflation now running at twice the ECB’s 2 per cent target level, Klaas Knot, one of two contenders to become the next ECB chief, said this week the bank’s interest rate policy was likely to remain hostage to developments in the Middle East and their impact on energy prices.
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He said that if energy prices remained roughly where they were, he saw little need for higher interest rates. “There may be a bit of extra tightening needed, but I don’t think an awful lot of it,” Knot said, adding that any interest rate changes needed to be “very measured”.
Another factor paving the way for another rate hike is euro zone growth, which has been more resilient in the face of inflation that many had predicted, helped in part by multinational exports from Ireland.
Gross domestic product (GDP) across the 21-member currency bloc rose 0.4 per cent in the third quarter, Eurostat said on Friday, matching an initial estimate from October.
This gives the central bank more leeway to counteract inflation with growth-anchoring interest rates.
The global economy is by no means out of the woods on inflation given the ongoing impasse in the Middle East.
Bond market turmoil is also expected to weigh on the growth as countries struggle to service their debts.
The ECB sees growth risks as tilted to the downside and those for inflation as skewed to the upside.
