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The European Central Bank is expected to increase interest rates again in December, with inflation running at twice its target and uncertainty over energy costs keeping policymakers under pressure. While most economists believe the decision will mark the final increase in the current tightening cycle, more than a third anticipate another hike in early 2027.
All 71 economists surveyed by Reuters between November 10 and 12 expect the ECB to lift its deposit rate to 2.75% next month. The move would follow previous increases in June and September, taking borrowing costs above the central bank's estimated neutral range of 1.75% to 2.50%.
The neutral range represents the level at which interest rates neither stimulate nor restrict economic activity.
October's inflation rate reached 4%, its highest level in three years, adding pressure on the ECB to maintain its efforts to contain price growth. At the same time, the Eurozone economy has demonstrated resilience, giving policymakers further room to consider tightening monetary policy.
However, economists remain divided over what happens after December. Forty-six of those surveyed, representing 65% of respondents, expect rates to peak at 2.75%. The remaining 25 anticipate at least one additional increase, most likely during the first three months of 2027.
Financial markets are taking a more cautious position, with investors anticipating two to three further rate increases by the end of next year.
Fabio Balboni, chief European economist at Wellington Management, described the December increase as almost certain. He put the chances of another hike in March at approximately 50%, pointing to expectations that core inflation will continue to rise.
Balboni nevertheless believes December could mark the end of the current cycle, provided energy prices do not experience another significant increase.
Energy costs remain a key risk
Recent declines in oil prices have offered some relief, with oil futures falling by at least 20% over the past few weeks. However, economists warn that the improvement does not eliminate the risk of another inflationary surge.
Natural gas supplies are a particular concern as Europe heads into winter. Storage levels remain low, while uncertainty over the prospects for peace in the Middle East adds another potential source of disruption to energy markets.
Jan von Gerich, chief analyst at Nordea, cautioned that falling energy prices could give a misleading impression of the risks facing the economy. An unusually cold winter could trigger a sharp increase in natural gas prices, potentially pushing inflation higher again.
Inflation forecasts revised upwards
The latest Reuters survey also points to a less favorable inflation outlook than previously anticipated. Economists now expect average inflation to reach 3.1% in 2026 and 2.8% in 2027, compared with their October projections of 3% and 2.6%, respectively.
These estimates suggest that inflation could remain close to twice the ECB's 2% target through at least the second quarter of 2027.
Economic growth projections for the Eurozone have also been adjusted upwards, although only slightly. Economists now forecast growth of 1.1% in 2026 and 1.3% in 2027, compared with previous estimates of 1% and 1.2%.
The latest figures leave the ECB facing a difficult balancing act. Policymakers must bring inflation under control without placing unnecessary pressure on an economy that continues to show signs of resilience.
