European Central Bank may bump interest rates in medium term

The rate cut cycle of the European Central Bank (ECB) is estimated to be largely over, but the bank may still resume cutting rates in the medium term, experts say.

The ECB is expected to leave its policy rates unchanged at its December meeting, but estimates for rate hikes in the medium term have now come on the agenda.

Since the bank's last meeting in October, evidence has come to the fore in support of the policymakers' view that the bank's monetary policy is in good shape. Eurozone macroeconomic data pointed to upside risks to growth and that inflation may further increase.

ECB board member Isabel Schnabel said the bank may be eyeing a rate hike rather than a cut, speaking in an interview to Bloomberg News earlier this month.

LAGARDE MAY NOT CONFIRM RATE CUT CYCLE IS OVER

Bas van Geffen, senior macro strategist at Rabobank, told Anadolu that "a few gradual hikes in early 2027" are in order for the ECB, after the eurozone economy gains momentum.

"We have penciled in two rate hikes, in March 2027 and June 2027," he said, adding that the bank does not have "any reason" to change its monetary policy at its December meeting, as economic data came in slightly better than the bank's expectations.

Geffen said the ECB is likely to make some improvements to its projections, as uncertainty remains high and the bank may feel reluctant to change its monetary policy.

"This may revive some rate cut expectations, but we don't believe this warrants further easing," he said. "Another hold will probably cement the markets' view that the cutting cycle is over but we do not expect (ECB President Christine) Lagarde to explicitly confirm this."

Geffen said Lagarde is likely to "repeat her 'good place' analogy," as the bank will look out for both upside and downside risks in the coming period.

"We also expect the ECB to be on hold through 2026. The ECB will probably upgrade its growth projections," he added.

ECB MAY LEAVE RATES AT CURRENT LEVELS FOR 2 YEARS

Marco Wagner, senior economist at Commerzbank, told Anadolu that Schnabel "feels comfortable" with the market estimates that the bank's next monetary policy decision will be to hike rates.

"The background to this statement is that Schnabel sees upside risks to growth and inflation," he said, noting that ECB economists may have a differing view on inflation.

"They are likely to forecast that inflation will not only be below the ECB's 2% inflation target in 2026 but will also be lower in 2027 (probably at 1.7%) due to the postponement of the EU Emissions Trading System 2 (ETS 2) from January 2027 to January 2028," he said.

Wagner said this situation could give rise to an argument against rate hikes in the near future.

"Our main scenario remains that key interest rates will remain at their current level over the next two years," he said. "In the medium term, however, we share Schnabel's concern about higher inflation."

He mentioned that structural factors like fiscal packages of eurozone countries and defense investments contribute to the situation.

"In this respect, we can also imagine interest rate hikes in the medium term," he added.