ECB's hawkish stance and rising energy prices prompt expectations of further rate hikes

ECB’s Hawkish Stance, Energy Prices Boost Chances of Further Rate Hikes

Market Reactions and Future Rate Hike Expectations

By Rashika Singh

Sept 10 (Reuters) - Wall Street banks Goldman Sachs and Citigroup, alongside Barclays, expect the European Central Bank to raise interest rates further after Thursday's hawkish policy decision reinforced concerns that inflation could remain elevated for longer.

ECB’s Recent Policy Decision

The central bank raised interest rates by 25 basis points, as expected, and projected that inflation would remain above its 2% target for an extended period.

Impact of Global Energy Prices

Renewed hostilities between the United States and Iran have pushed crude prices above $100 a barrel, worsening the inflation outlook for the euro zone and reinforcing expectations that policymakers may need to keep monetary policy restrictive for longer.

Bank Forecasts on Future Rate Hikes

While Goldman Sachs, Citi and Barclays expect the ECB to raise rates again in December, Citi anticipates an additional hike in March 2027. Traders are pricing in a 94% chance of a quarter-point rate hike in December, according to LSEG data.

Economists’ Perspectives

"The longer inflation remains high, the more pronounced the risks that it becomes endogenous," Citi economists said.

UBS and Barclays’ Outlook

Swiss investment bank UBS, through its Global Research and Global Wealth Management divisions, also expects the ECB to hike rates in December, although UBS Global Research sees the move being reversed later, with rates returning to 2.5% by the fourth quarter of 2027.

Barclays said the ECB's latest rate hike, which President Christine Lagarde described as a "no-brainer", underscored policymakers' continued focus on taming inflation, which the central bank does not expect to return to its 2% target until late 2027. Goldman Sachs said a December rate hike would push interest rates into "mildly restrictive territory".

Looking Ahead: Data-Dependent Decisions

The ECB has increasingly emphasised that future policy decisions will be data-dependent. Policymakers are due to meet on October 29.

Global Central Bank Meetings in Focus

Attention is also turning to next week's much-anticipated Federal Reserve and Bank of Japan meetings for signals on whether interest rates could stay higher for longer.

(Reporting by Rashika Singh in Bengaluru; Editing by Sonia Cheema and Mrigank Dhaniwala)