JPMorgan has forecast a third European Central Bank interest-rate increase in December, warning that persistent energy costs, resilient growth and stubborn core inflation could keep borrowing costs moving higher across the eurozone.
The bank expects the ECB to raise its policy rate to 2.5% at next week’s meeting before delivering another quarter-point increase in December, taking the rate to 2.75%.
The ECB is due to meet on September 9 and 10, with its Governing Council having already raised rates once in June. It left borrowing costs unchanged in July, while stressing that future decisions would depend on incoming economic data and the inflation outlook.
Greg Fuzesi, an economist at JPMorgan, said the prospect of a third increase reflected a combination of stronger-than-expected economic activity, continuing price pressures and a potential rise in the ECB’s estimate of the neutral interest rate.
Markets are already pricing in the possibility of a fourth increase after December, although that is not part of JPMorgan’s central forecast. Mr Fuzesi said an additional move could come as soon as March if inflationary pressures persist.
The bank’s assessment has been shaped by the impact of the conflict in the Middle East on energy markets. European natural gas prices are expected to remain elevated through the winter, increasing the risk that higher energy costs feed into wider inflation.
Mr Fuzesi said ECB policymakers had become more hawkish when the conflict appeared to be worsening and less hawkish when the prospect of de-escalation increased. He argued that an energy supply shock would generally strengthen the case for higher rates because any damage to growth would only partly offset the inflationary effect.
Economic growth has also proved firmer than JPMorgan expected before the conflict, reducing the risks associated with further tightening. At the same time, core inflation has not eased as quickly as anticipated, with technology prices and more persistent wage growth adding to pressure on the ECB.
JPMorgan expects the policy rate to remain at 2.75% throughout 2027, with any reduction in borrowing costs pushed back until 2028. The outlook could change if the Middle East conflict de-escalates, energy markets settle after the winter or wage growth moves more clearly into line with the ECB’s inflation target.
