1. Today's Decision: 25 Basis Point Rate Hike to 2.50% The market has already fully priced in the European Central Bank's (ECB) 25 basis point increase in the deposit rate to 2.50%. As the rate decision itself is unlikely to be a major surprise, the market's main focus will be on ECB President Lagarde's press conference.
2. Economic Background: Energy Shock and Accelerating Inflation
Eurozone overall inflation accelerated to 3.3% year-on-year in August, with geopolitical tensions pushing up energy prices. European gas prices recently hit their highest level since 2022. Meanwhile, core and service inflation continued to slow, and economic activity was more resilient than expected. This rate hike will bring the deposit rate to the upper end of the ECB's projected neutral range.
3. Statement Forecast: Little Change, Maintaining Meeting-by-Meeting and Data-Driven Approach
It is widely believed that the ECB is unlikely to make significant changes to its statement, and is expected to maintain its meeting-by-meeting and data-driven wording. The economic assessment is also unlikely to undergo substantial changes, namely that economic growth is more resilient than expected, inflation remains above target, and energy prices pose a new upside risk. Therefore, the balance of risks will remain broadly unchanged, with downside risks to economic growth and upside risks to inflation. 4. Lagarde's Tone: Hawkish or Dovish?
Governor Lagarde is expected to avoid giving clear guidance for the next meeting, but her tone will be crucial. A more hawkish stance might emphasize the persistence of the energy shock, the risk of inflation remaining above target for an extended period, and the possibility of further tightening. A more dovish stance might emphasize slowing core and services inflation, the risk of excessive tightening, and the impact of higher interest rates on already strained financial conditions.
5. Economic Forecasts: Upward Revision of Growth, More Complex Inflation Outlook
Markets expect the ECB to raise its economic growth forecasts, reflecting better-than-expected performance of the Eurozone economy. Inflation forecasts are divided: Goldman Sachs expects a 0.1% downward revision to both overall and core inflation in 2026, but an upward revision of 0.4% to 2.7% for overall inflation and 0.1% to 2.6% for core inflation in 2027; UniCredit also expects a hawkish inflation forecast; Mitsubishi UFJ Financial Group expects a possible downward revision to overall inflation in 2026 and warns that its forecast may be outdated.
6. Policy Guidance: Focus on Whether September Ends the Rate Hike Cycle
The market will focus on Lagarde's policy guidance to determine whether September signifies the end of the current rate hike cycle or still leaves room for further increases. Mitsubishi UFJ and ING Group tend to view September as the end of the cycle; Goldman Sachs, Wells Fargo, and UniCredit believe there is still a substantial risk of further tightening if energy prices remain high or inflation expands. Most institutions do not expect the ECB to explicitly commit to another rate hike.
7. Full-Year Path and Euro Performance: Euro Strength Depends on Hawkish Stance
The market has already priced in a cumulative tightening of approximately 48 basis points by the end of this year and 85 basis points by the end of 2027, meaning the ECB needs to release a more hawkish signal than the market expects to boost the euro. If Lagarde adopts a cautious stance, the market may lower its rate hike expectations and put pressure on the euro.
8. Subsequent Risks: US CPI and FOMC May Quickly Steal the Focus
Even if the ECB successfully releases hawkish signals, the euro's rally may face the risk of reversal as attention quickly shifts to the US CPI and the FOMC decision. Changes in the Fed's expected policy path may once again dominate the euro/dollar exchange rate.
