Standard Chartered has revised its outlook for the European Central Bank, now expecting policymakers to raise the deposit rate by 25 basis points to 2.75% in December, reversing its earlier forecast that the central bank would leave rates unchanged.
The change in outlook follows stronger-than-expected euro zone inflation in September and signs that economic activity has remained more resilient than previously anticipated.
Inflation accelerated during the month, driven largely by higher energy prices, while recent business activity indicators suggested that the euro zone economy has maintained greater momentum than Standard Chartered had earlier projected.
The shift puts Standard Chartered broadly in line with expectations among several major Wall Street banks, which have increasingly anticipated another ECB rate increase before the end of the year.
Energy prices add to inflation concerns
The latest inflation developments have complicated the ECB’s efforts to balance price stability against economic growth.
Higher energy costs have emerged as a key source of renewed inflation pressure, raising concerns among policymakers that an initial increase in energy prices could eventually feed into broader consumer prices and wages.
Standard Chartered economists said the ECB could respond by moving borrowing costs slightly further into restrictive territory.
“We think the ECB will opt to take rates slightly into restrictive territory,” the brokerage's economists wrote in a note.
They added that policymakers could be seeking insurance against the possibility that higher energy prices could spread into wages and create wider and more persistent price pressures.
The analysts noted, however, that there were still limited signs of significant second-round effects from the energy shock.
December meeting seen as key
The ECB is scheduled to hold its next monetary policy meeting on October 29, but Standard Chartered believes a December increase is more likely.
By then, policymakers will have access to updated economic forecasts and another set of inflation data, which could provide greater clarity on whether price pressures are becoming entrenched.
The timing would also allow the central bank to assess whether the recent resilience in economic activity is sustained and whether higher energy costs are beginning to influence wages and underlying inflation.
Markets price in higher odds of December move
Financial markets have also increased the probability assigned to another ECB rate increase.
According to LSEG data, money markets were pricing in approximately a 65% probability of a 25-basis-point rate hike in December.
The market pricing indicates that investors increasingly see another increase as a plausible outcome, although it remains dependent on incoming economic and inflation data.
The ECB, alongside several other major central banks, raised interest rates last month as policymakers sought to contain renewed inflation risks associated with higher energy costs and resilient economic activity.
The December decision will therefore be closely watched by investors, businesses and households across the euro zone, particularly as policymakers weigh the need to contain inflation against the potential impact of tighter financial conditions on economic activity.