ECB rate hike outlook lifted by JPMorgan

The bank sees a second straight hike next week to 2.5% as “near-certain,” with December following if inflation stays sticky and gas prices remain high through the winter. Economist Greg Fuzesi said the ECB has become more sensitive to developments in the Middle East, where any escalation can feed European energy prices even as it weighs on growth.

That dynamic is crucial for the eurozone economy. JPMorgan said growth has held up better than it expected before the conflict, giving the ECB more room to tighten without immediately choking off activity. At the same time, core inflation has been slower to ease than forecast, with wage growth and technology prices adding to price pressure.

Markets are already largely pricing in another ECB move after December, though JPMorgan does not yet include a fourth hike in its base case. A further increase could still come as soon as March if inflation and energy markets remain hot, while a lasting easing in Middle East tensions or softer wages could reduce the need for more tightening.

For investors, the message is that European rates may stay high well into 2027, with JPMorgan not expecting the policy rate to come down from 2.75% until 2028. That keeps pressure on eurozone borrowers, supports the euro, and leaves rate-sensitive assets such as bonds and real estate vulnerable if the ECB follows through on the bank’s outlook.

The market backdrop reflects that shift. The euro has held near 1.16 against the dollar, while U.S. Treasury bond sentiment remains weak and the dollar has firmed, underscoring how global rate expectations are still being shaped by central banks fighting inflation rather than preparing to cut.

The next catalyst is the ECB meeting next week, with traders then focused on December inflation readings, energy prices and any further escalation or de-escalation in the Middle East.