Eagle cries rise again! Markets fully price in three more ECB rate hikes before mid-2025; reports say officials are considering a hike as early as October.

Following the ECB’s latest rate hike, market bets on further monetary tightening have surged markedly. Interest rate swaps now fully price in three additional 25-basis-point hikes by mid-2025—amounting to a cumulative tightening of approximately 76 basis points by June 2025; previously, markets had only fully priced in three hikes by October 2025. Meanwhile, according to Bloomberg’s report citing informed sources, ECB officials have already begun considering further rate hikes, potentially as early as October. The sources noted that to curb inflation persistently above 3%, the ECB may need to adopt a more restrictive monetary policy. However, the market’s current pricing of three additional hikes may be overly aggressive; December could prove a more appropriate timing, as the ECB will then release its updated economic forecasts covering up to 2029. Bond markets have likewise reacted swiftly to the tightening expectations: Germany’s 10-year government bond yield rose sharply by six basis points to 3.51%, hitting its highest level since 2009. Energy shocks fuel inflation expectations, prompting markets to bet on further ECB hikes. On September 10, the ECB’s Governing Council announced a 25-basis-point increase across all three key interest rates—fully in line with market expectations. This decision takes effect on September 16, raising the deposit facility rate, main refinancing operations rate, and marginal lending facility rate to 2.50%, 2.65%, and 2.90%, respectively.

France’s August inflation exceeds expectations; Spain’s rises to 4.5%, a three-year high: markets fully price in an ECB rate hike in September.

More notably, the July meeting minutes reveal that policymakers have already begun discussing whether a ‘moderately restrictive’ policy stance is needed to ensure inflation returns to target—suggesting rates may ultimately need to rise above 2.5%, the upper end of the neutral range as described by Chief Economist Philip Lane. Energy shocks reignite inflation in France. Spain’s August CPI surged to 4.5% year-on-year—the fastest pace since 2023—and its economy remains among the fastest-growing in the euro area’s major economies. France’s inflation accelerated to 2.7%, the highest since May; as the eurozone’s second-largest economy, France also saw its growth projections for the first half of 2026 substantially downgraded. Energy is the core driver of inflation in both countries, rooted in the ongoing military conflict in the Middle East. To cushion the impact of the Iran-related war, the Spanish government approved a €5 billion ($5.8 billion) aid package in March—including energy tax cuts—whose measures remain in force but have diminished in effectiveness since their initial rollout. Eurozone-wide inflation data for 21 countries will be released next week; analysts expect it to exceed 3%. A monthly report released by the European Commission on Friday showed that consumers’ 12-month-ahead inflation expectations rose markedly in August, while firms’ price-setting expectations across all sectors stood above their long-term averages. Markets fully price in a 25-basis-point hike in September, lifting the deposit facility rate to 2.5%. Thursday’s release of the July meeting minutes revealed that policymakers discussed whether a ‘moderately restrictive’ monetary policy would be necessary to bring prices back to target—implying rates could surpass 2.5%, the upper bound of the neutral range, as previously indicated by Philip Lane. Paul Hollingsworth, Head of Developed Market Economics at BNP Paribas, stated that a September hike is ‘all but certain,’ yet ‘the path beyond September remains highly uncertain.’ The debate may now shift toward whether a restrictive stance is warranted—and the answer may become clear at the December meeting.

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