Key Takeaways
- While an interest rate hike in September is widely expected, economists and traders’ views diverge on what comes next.
- The knock-on effects of rising energy prices is set to shape the path of ECB policy well into next year.
- Some observers even see room for a return to rate cuts if growth slows next year.
The European Central Bank paused its tightening cycle in July, but few economists believe it is done raising interest rates. The twelve months ahead may bring not just more rate hikes, but yet another reversal as well.
Most analysts expect a 0.25 percentage point increase at the ECB’s Sept. 10 meeting, with a further hike later this year remaining a distinct possibility. Beyond this year, the outlook becomes far less certain as the conflict in the Middle East continues. The question is whether higher energy prices spill over into wages and keep inflation elevated, or subdued inflation and slowing economic growth pave the way for rate cuts in 2027.
As oil and natural gas prices remain high, lifting inflation across the euro area, central bankers have to assess whether higher energy costs threaten to spill over into wages, inflation expectations, and broader price pressures.
In July’s rate decision announcement, ECB President Christine Lagarde stressed the ECB Governing Council will closely monitor these “second-round effects.” These occur when companies pass on higher costs to consumers, who then demand higher wages.
“Uncertainty remains high and the full inflationary impact of the energy shock has yet to play out,” she said on July 23. The longer energy prices stay high, the more likely they are to drive up broader inflation through indirect and second-round effects.
“We are therefore closely monitoring the intensity and duration of the shock, as well as its indirect and second-round effects,” she said.
What Are ECB Rates Right Now?
The ECB began a cycle of rate hikes in July 2022, raising the deposit rate from -0.50% to 4.00% through 10 consecutive increases. From September 2023, it then cut interest rates eight times, bringing the benchmark rate back to 2.00%, before policymakers resumed raising rates in June 2026.
Since June 17, the three ECB key interest rates are:
- Deposit rate: 2.25% (up from 2.00%)
- Main refinancing rate: 2.40% (up from 2.15%)
- Marginal lending facility: 2.65% (up from 2.40%)
Will the ECB Raise Interest Rates Again in September?
There is little disagreement among economists about the near-term outlook. “The range of economists’ expectations for European interest rates is actually quite tight,” says Morningstar chief market strategist Michael Field. “It’s very likely the ECB will raise rates at the next meeting in September to 2.50%, with almost a 50/50 chance of a further rate increase in December, bringing the deposit rate to 2.75%.”
Futures markets support this view. Traders currently price in an 80% probability of a September rate hike, plus a 40% probability of a further increase by December. In total, these markets indicate just under two additional quarter-point hikes by the end of July 2027.
Bastian Freitag, head of economic research at Rothschild & Co Wealth Management Germany, says that markets are underestimating the possibility of the ECB remaining on hold instead.
“Our base case is also that the ECB will raise rates by 25 basis points at its September meeting. That said, we also believe the probability of the ECB leaving rates unchanged is higher than the market is currently pricing in,” he says, arguing that inflation remains largely energy-driven and that there is still little evidence of second-round effects.
Could the ECB Raise Rates Two More Times in 2026?
Another rate hike after September is deemed realistic by many economists. Mark Dowding, fixed income CIO at RBC BlueBay Asset Management, says the ECB has provided relatively clear guidance toward a September increase. He says that next month may not be the final hike of the current cycle, particularly while energy markets remain under upward pressure.
Enrique Díaz-Alvarez, chief economist at Ebury, also believes the case for another increase has strengthened. He says that stronger-than-expected euro area growth in the second quarter and resilient economic activity have reinforced market expectations for a September rate hike, while the conflict in the Middle East has so far had a surprisingly limited impact on the broader eurozone economy.
When Are the Next ECB Meetings in 2026?
- Sept. 10, 2026
- Oct. 29, 2026
- Dec. 17, 2026
Why Everyone Is Watching the Oil Price
The renewed escalation in the Middle East pushed oil and gas prices sharply higher in July, lifting headline inflation across the euro area: July inflation rose to 2.9% and core inflation, which excludes volatile components such as energy and food, edged up to 2.5%, reinforcing the view that the ECB may not be finished tightening. The unexpected uptick in core inflation also fueled concerns that price pressures may prove more persistent.
According to Rothschild’s Freitag, the connection between energy markets and monetary policy has become unusually strong. “Oil prices are the most important correlating factor for inflation expectations—meaning that when oil prices rise, expectations that the policy rate will rise follow.”
Ulrike Kastens, senior economist at DWS, also says that the recent rise in inflation can largely be traced back to higher energy prices, while indirect effects have so far remained limited. Given continued volatility in energy markets, she also expects the ECB to raise its deposit rate to 2.50% in September.
ECB economists argue that policymakers must distinguish between demand-driven inflation, which usually requires a firm monetary policy response, and supply-driven inflation, which often results from developments largely outside a central bank’s control. The latter calls for caution rather than an automatic policy tightening.
For policymakers, the crucial question is therefore whether energy price increases spread through the wider economy.
Are We Seeing Second-Round Effects?
Lagarde repeatedly stressed after the ECB’s July meeting that policymakers are less concerned about the initial energy shock itself than about its transmission into wages, services inflation and inflation expectations.
Still, economists remain divided over how much weight should be placed on July’s inflation report.
July’s increase in core inflation to 2.5% suggests the ECB cannot yet declare victory over inflation, but many economists note weak evidence that higher energy costs have triggered broad-based second-round effects.
Deutsche Bank Research says July’s data provides only tentative evidence that the energy shock is feeding into underlying inflation. While energy prices appear to have pushed up some core goods prices, the analysts see no convincing signs that inflationary pressures are spreading broadly across the economy.
Felix Schmidt, senior economist at Berenberg, cautions against reading too much into one month’s inflation data. Services inflation remains elevated, but has hovered around similar levels for much of the past three years.
Wage data also paints an even calmer picture, and Freitag believes this is a strong argument against persistent inflation. “We are currently not observing any second-round effects,” he says. “Right now we see neither rising inflation expectations nor rising wage growth—and therefore no wage-price spiral at this stage.”
Could the ECB Return to Cutting Rates in 2027?
Markets broadly expect the ECB to keep interest rates at restrictive levels through mid-2027, with interest rate derivatives pricing in modest additional tightening beyond this year. Morningstar’s Field says: “Beyond 2026, the outlook is much less well known. For the most part, market commentators believe rates will remain stagnant. High enough to combat any persistent inflation, but low enough not to detract materially from economic growth in the region—goldilocks territory, if you will.”
However, Rothschild’s Freitag argues that the case for rate cuts could gradually build during 2027 for two reasons. One is base effects. “From March 2027, base effects will start showing up in the inflation data, because oil prices spiked in March with the start of the Middle East conflict. That means the year-on-year rise in inflation should look more moderate from March 2027 onward. At that point, the arguments for further rate hikes won’t be as strong either,” he says.
The second is the delayed transmission of monetary policy. According to Freitag, it takes around nine to 18 months for higher interest rates to work their way through the real economy, meaning the full impact of June’s rate hike will only become fully apparent in early 2027.
“We see good odds that, by 2027 at the latest, the arguments for further rate hikes will no longer be as strong. Inflation will likely play a smaller role at that point due to base effects, while growth could come under pressure from monetary transmission. Should second-round effects fail to materialize, there would be a real case for bringing rates back down.”
