US Market: J.P. Morgan, BNP Paribas expect ECB rate hike in December as inflation risks persist

J.P. Morgan and BNP Paribas now expect the European Central Bank to deliver another 25-basis-point interest rate hike in December, reversing their earlier forecasts that the central bank's tightening cycle would end without a December increase.

The revised forecasts come as persistent inflation risks and elevated energy prices strengthen the case for further monetary tightening. Reuters reported that both brokerages had previously expected the ECB's rate-hiking cycle to end without a December increase.

The change in expectations suggests eurozone borrowing costs could remain higher for longer than previously anticipated, with resilient economic growth and continuing energy supply concerns adding to inflationary pressures.


Markets have almost fully priced in a 25-basis-point ECB rate increase at its September 10 policy meeting. According to LSEG data cited, markets were pricing in a 99.2% probability of a quarter-point hike.

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Energy prices fuel inflation concerns

Oil prices have eased from recent highs but remained above $95 a barrel, while eurozone government bond yields retreated from multiyear peaks following recent market pressure.

The rise in energy prices has been linked to the escalating conflict in Iran, raising concerns that higher fuel and energy costs could feed into broader inflation and lead to tighter monetary policy.

BNP Paribas expects the ECB to raise rates by 25 basis points at its September meeting while keeping the possibility of further increases open if evidence of so-called second-round effects from higher energy prices becomes stronger.

Second-round effects occur when an initial increase in energy prices begins to spread through the wider economy, including through higher wages, services costs and consumer prices.

J.P. Morgan sees scope for another hike

J.P. Morgan has also shifted its outlook toward another rate increase in December. Reuters reported that the brokerage's revised view is based on the combination of persistent energy price pressures, solid economic growth, sticky core inflation and expectations that the ECB's neutral interest rate is moving higher.

The brokerage had previously expected the ECB to conclude its tightening cycle without a December hike.

The revised forecasts from the two major brokerages indicate that policymakers could face a more difficult inflation environment if elevated energy costs persist.

ECB faces a delicate policy balance

The ECB must balance the need to prevent a renewed rise in inflation against the risk that higher interest rates could weigh on economic activity.

Resilient growth could give policymakers greater scope to maintain a restrictive monetary stance, while persistent energy inflation could make it more difficult for the central bank to declare victory over price pressures.

For financial markets, the shift in expectations increases the possibility that euro zone interest rates will remain elevated for longer than previously expected.

Investors will closely watch the ECB's September meeting and subsequent guidance for indications of whether policymakers see enough evidence to justify another rate increase later in the year.

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