A December “last hike” view mainly affects the euro front end, with Euribor, €STR futures and one- to two-year government bond yields most exposed to shifts in pricing. Capping expectations could reduce volatility further out the curve, while short-dated contracts stay sensitive to each inflation print. Energy is the swing factor: further gains in oil and gas prices would strengthen the case for tightening and could support the euro. Leadership uncertainty adds a policy risk premium into 2027, which could weigh on the single currency if succession becomes politically contested.
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Earlier:
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Deutsche Bank thinks the ECB has one more hike in it, and that the coming change of personnel matters less than the price of energy.
Summary:
- Deutsche Bank expects one more ECB rate hike in December, likely the last of the cycle
- Its view is that hikes so far and tighter financial conditions may not be enough if energy prices keep rising
- The ECB held all three key rates on Thursday, with the deposit rate at 2.5%, as Deutsche Bank expected
- Lagarde will step down in February, Schnabel leaves in January and Lane’s term ends in May
- Deutsche Bank says the leadership changes make the path harder to predict but do not automatically alter it
- Knot and Hernández de Cos are among the early contenders to succeed Lagarde
Deutsche Bank expects the European Central Bank to raise interest rates one more time in December. It argues that the tightening already delivered may not be enough to contain inflation if energy prices keep rising.
The call follows Thursday’s ECB meeting, at which policymakers held all three key interest rates steady, leaving the deposit rate at 2.5%. Deutsche Bank had expected the pause, describing it as a measured response to the energy price shock. The euro and euro zone bond yields fell after the decision.
Mark Wall, chief European economist at Deutsche Bank Research, said the rate increases delivered so far are unlikely to be sufficient on their own if energy costs continue to feed through to consumer prices, even together with the tightening in financial conditions since September. The bank therefore still sees a final hike in December, a move it regards as the likely end of the current tightening cycle.
Wall also acknowledged that forecasting the ECB’s path has become more difficult, in part because of a wave of leadership changes at the central bank. President Christine Lagarde will step down in February, roughly nine months before her eight-year term was due to end in October 2027. She is only the second ECB president to leave early. Executive board member Isabel Schnabel is also departing a year early, in January, to take up a senior role at the International Monetary Fund. Chief economist Philip Lane’s term expires in May.
The race to succeed Lagarde is already under way. The Dutch government is backing former Dutch central bank governor Klaas Knot, while Spain supports Pablo Hernández de Cos, general manager of the Bank for International Settlements and a former Bank of Spain governor.
Wall questioned whether the leadership changes would alter decision-making. He argued that the ECB as an institution is bigger than any single president and that a new head does not automatically mean a different rate path.
If Deutsche Bank is right, the December move would set a ceiling on near-term rate expectations and shift the debate from how high rates go to how long they stay there. The new leadership’s tone in 2027 will then become the key question for markets.
This article was written by Eamonn Sheridan at investinglive.com.