This week, financial markets are focusing on the interest rate decision by the European Central Bank (ECB). The monetary policymakers are convening in Frankfurt am Main to discuss measures for controlling inflation, which has seen an increase since the outbreak of the Iran war at the end of February. A key focus will be on the extent to which the ECB will adapt its monetary policy to current economic conditions.
After the ECB raised the key interest rate by 0.25 percentage points at its June meeting, current indicators suggest that the deposit facility rate will be maintained at 2.25% in the upcoming decision. Implied probabilities in both financial markets and online betting markets indicate that the key interest rate will remain unchanged in this round. This assessment aligns with statements made by ECB President Christine Lagarde, who gave no hint of a possible key rate hike in July during her opening speech at the annual monetary policy symposium in Sintra.
The latest economic and inflation data published since the last ECB meeting also support the assumption of stable interest rate policy. Growth has recently proven more stable, while inflation has tended to be milder. Only the increased energy prices in July could serve as an argument for a key rate increase. However, such a development is deemed insufficient for an immediate interest rate adjustment.
For subsequent ECB meeting dates, a key rate hike in September is considered probable. This expectation is supported by a majority of surveyed economists as well as by financial market-implied probabilities. However, forecasts for the period thereafter show significant differences between market expectations and the internal assessment of leading financial institutions.
While markets anticipate another key rate hike by February 2027 and expect the key rate not to fall until the end of 2027, but rather to rise slightly by the end of September, such an pronounced tightening of monetary policy is considered unlikely. After the expected rate step in September 2026, no further key rate increase is expected. Instead, it is assumed that the ECB will, given a favourable inflation trend, adjust the deposit facility rate back to the neutral level of 2% in two steps during the first half of 2027. Inflation in the Eurozone is expected to significantly approach the 2% target mark again from mid-2027 and remain there permanently.
