Economists anticipate the European Central Bank will deliver its second and final rate increase of the current tightening cycle on September 10, after which it will halt its monetary policy adjustments. A comprehensive survey indicates that a vast majority of economists project a 25-basis-point increase in the deposit facility rate to 2.5% next Thursday, with the rate expected to remain unchanged through 2027. This forecast is notably more dovish compared to current money market pricing, which suggests roughly three additional rate hikes by mid-next year.

A modest tightening path ahead

Should the ECB follow through with a September hike and then pause, this tightening cycle would include just two increases, making it the shortest such episode since 2011. This scenario bears a striking resemblance to that year, when the central bank raised rates twice in quick succession amid an oil price surge, a move later viewed by many policymakers as a misstep. With inflation again being fueled by energy costs, halting after a September move signals a significantly more restrained response to supply-side shocks. Prioritizing the avoidance of overtightening and reducing the risk of a hard economic landing appears to be a growing policy consideration.

Currently, a 25-basis-point rate hike next week is widely seen as a foregone conclusion. Headline inflation continues to run hot, with expectations of it remaining above 3% for the rest of the year, making it difficult for most policymakers to openly oppose another increase. Meanwhile, renewed conflict in the Middle East has once again rattled energy markets, driving international oil prices back toward $100 per barrel and pushing natural gas prices to levels not seen since 2023. Although persistently high inflation has yet to show signs of becoming deeply entrenched, risks are omnipresent.

At the same time, the eurozone economy has shown unexpected resilience lately. On one hand, some Asian competitors have been hit harder by the blockade of the Strait of Hormuz, leading to orders and parts of supply chains shifting toward Europe. On the other hand, expansionary fiscal policies in several countries continue to support growth momentum. Consequently, next week's rate decision is widely regarded as a "precautionary hike," aimed primarily at reinforcing the central bank's anti-inflation credibility and effectively preventing energy price shocks from translating into indirect or second-round effects through wage negotiations and pricing behavior.

Ken Egan, a director at Kroll Bond Rating Agency Europe, noted: "The ECB will likely describe a 25-basis-point raise as a necessary step. However, it probably won't signal further hikes, maintaining instead its emphasis on data dependence, anchored inflation expectations, contained wage growth, and the need to assess how forcefully previous policy tightening is transmitting to the economy."

Data shows that the eurozone's inflation rate climbed to 3.3% in August, further overshooting the ECB's 2% target, providing justification for a September move. Nevertheless, the survey reveals that a majority of economists believe the energy price surge won't soon morph into broader inflationary pressures, underpinning market bets for a halt after September. Among the respondents, very few could cite evidence that companies and consumers are preparing for stronger price pressures ahead, with most expressing only mild concerns about spillover effects, including in wages.

Though ECB policymakers largely agree that inflation at a three-year high hasn't shifted medium-term expectations or impacted wage levels, this situation could still evolve. ECB Executive Board member Isabel Schnabel emphasized that it is "essential" to curb second-round effects early, before they necessitate stronger responses. Governing Council member Martin Koch stated that the coming months will offer more clarity on whether any such effects have materialized. Some ECB officials are already looking ahead. Gediminas Šimkus suggested that a single rate increase next week "will not be enough," while Dimitar Radev called both September and December meetings "live" options where borrowing costs could rise further.

Ulrike Kastens, senior economist at DWS International, commented: "The ECB is unlikely to hint at further rate rises in the coming months. However, we see the risks for the next policy move as still tilted toward the upside, with a hike appearing more likely than a cut."

Another increase would bring the deposit rate to levels more likely to restrain economic activity. More than three-quarters of survey respondents believe that even at 2.5%, rates would sit slightly above neutral. So far, the European economy has proven robust enough to withstand a more restrictive monetary environment. Second-quarter output growth beat expectations, and business surveys point to sustained momentum.

ECB likely to affirm medium-term outlook

Economists also expect the ECB to upgrade its 2026 growth forecast while confirming its medium-term projections and inflation outlook. Achieving this hinges on how the Middle East situation evolves. Renewed hostilities between the US and Iran over control of the Strait of Hormuz could prolong a conflict already lasting six months. Dennis Shen, a lecturer at Berlin's Technical University's School of Management, said the waterway "has become a pivotal variable for the ECB's future decisions, because if the disruption persists too long, the energy price shock will evolve into a broader inflation problem." He added: "The ECB can afford to look past a temporary energy shock, but it cannot afford to ignore a persistent one."