Rate hikes, rate hikes, rate hikes… Each central bank has its own 'woes'.

Liu Ying, a researcher at the Chongyang Institute for Financial Studies at Renmin University of China, told the International Business News that the eurozone’s August consumer price index (CPI) rose above 3%, hitting a three-year high. Energy prices were the primary driver behind the overall CPI increase and the main contributor to inflation. Philip R. Lane, Chief Economist of the European Central Bank (ECB), likewise issued a warning: “We are witnessing a second round of energy price increases.” In addition to the recent oil price surge, natural gas prices have also risen in tandem—pushing inflation higher and prolonging its persistence, with inflation not expected to return to the ECB’s target until mid-2027. He cautioned that if the energy shock this autumn proves more severe and prolonged, pressure on the European economy will intensify further. Beyond imported inflation, external interest-rate differentials pose an additional challenge. Liu Ying pointed out that market expectations of U.S. Federal Reserve rate hikes have pushed up dollar-denominated interest rates, triggering capital repatriation. If the ECB fails to follow suit, widening interest-rate differentials could accelerate capital outflows and destabilize financial markets. Yet the eurozone’s own recovery remains fragile. The ECB’s September report forecasts GDP growth of just 0.9% for 2026, rising only slightly to 1.4% in 2027 and 1.5% in 2028. Although growth in Q2 2026 slightly exceeded expectations, it was driven mainly by external demand and tourism. Investment and consumption remain weak, and risks of wage–price transmission are mounting. “The eurozone’s economic momentum has already slowed, exhibiting stagflation-like characteristics,” Liu Ying analyzed. “Raising rates too quickly would suppress investment and manufacturing—sectors whose growth is already precarious. Yet holding rates steady risks allowing energy-driven price increases to transmit along supply chains into wages and service prices. This tug-of-war makes the ECB’s policy decisions especially cautious. Structural constraints cannot be overlooked either. Unlike the United States—a major energy producer—the eurozone relies heavily on imported energy, making it more directly vulnerable to imported inflation. Uneven recovery across member states also complicates policy coordination. In highly indebted countries such as Italy, rate hikes would directly push up government bond yields. For these reasons, the ECB reiterated its “data dependence” principle in its latest statement, refusing to pre-commit to any fixed interest-rate path. Markets interpreted this as signaling flexibility—adjusting policy based on incoming data rather than embarking on a predetermined series of rate hikes. ECB President Christine Lagarde stated confidence in inflation’s eventual return to target during her subsequent press conference—but emphasized that policy effectiveness still requires time and empirical validation. Every future decision, she stressed, will be grounded in current data to ensure sufficient responsiveness to evolving economic conditions. Nonetheless, hawkish voices within the ECB’s Governing Council remain vocal. Council member Martins Kazaks noted that narrowing output gaps may strengthen price–wage transmission, raising the likelihood of further tightening. Council member Pablo Hernández de Cos warned that natural gas, electricity, and food prices are emerging as new critical risk factors—and that actual inflation could exceed even the ECB’s recently revised upward forecasts. ING therefore expects the ECB to raise rates by 25 basis points in December. Liu Ying similarly judges a December rate hike possible, though overall room for further hikes remains limited. “There is relatively little scope for consecutive, large-scale rate hikes,” she said. In her view, the ECB must strike a delicate balance between fighting inflation and supporting growth—given the current economic landscape, sustained, aggressive monetary tightening is simply unsustainable.

Will the European Central Bank be the first to raise rates next week?

If the European Central Bank opts to raise rates next week, it would become one of the first major advanced-economy central banks to adopt tightening measures in response to the current inflation rebound—and could set a precedent influencing the future policy choices of the U.S. Federal Reserve, the Bank of England, and the Bank of Japan. It might even serve as a global “barometer” indicating whether monetary policy worldwide is poised to re-enter a tightening cycle. What has shifted market expectations first and foremost is inflation. On June 2, Eurostat reported that the eurozone’s inflation rate rose to 3.2% in May—up from 3.0% in April and significantly exceeding the ECB’s 2% target. Energy prices surged approximately 10.9% year-on-year, while services inflation also broadened. For ordinary citizens, inflation means more expensive fuel, pricier travel, and costlier meals; for the ECB, it signals a more troubling development—the spread of price pressures beyond the energy sector into broader segments of the economy. Compounding the problem is ongoing uncertainty in the Middle East. As a net energy importer, Europe remains highly sensitive to fluctuations in global oil prices. Should international oil prices remain elevated, inflationary pressure on the eurozone over the coming months is likely to intensify further—fueling growing market concerns that the ECB may have no choice but to “pull out the rate-hike card” once again. Moreover, recent statements from ECB officials have grown markedly more hawkish compared to those made earlier this year. Joachim Nagel, President of Germany’s central bank (the Bundesbank), stated that the ECB must act if the inflation outlook fails to improve; ECB Executive Board member Isabel Schnabel emphasized that even if geopolitical risks ease, current inflationary pressures must not be underestimated; and Pierre Wunsch, Governor of the National Bank of Belgium, stressed that the ECB must safeguard its credibility in fighting inflation. Yet even as inflation rises, the European economy itself appears to be losing steam.

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