We expect the ECB to raise policy rates by 25bp on Thursday 10 September, taking the deposit rate to 2.50%, in line with consensus and market pricing. The move has been well telegraphed by recent comments from GC members and the July minutes. With headline inflation at 3.3%, growth near potential and inflation risks tilted to the upside, the decision is straightforward according to the ECB. Attention will instead focus on signals about further tightening beyond September, which is not as straightforward in our view.
We expect Lagarde to retain full flexibility, leaving the door open to further tightening without pre-committing to additional hikes. Having moved away from forward guidance, she will likely restate the ECB’s reaction function rather than signal a specific rate path. Market rates have risen sharply over the past month amid renewed US–Iran tensions, with short-term pricing implying a peak deposit rate near 3.00% in 2027. While we view these expectations as excessive, we do not expect Lagarde to push back, given persistent upside inflation risks and a solid growth outlook despite tighter financial conditions.
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