The European Central Bank, or ECB, decided to raise interest rates by 0.25%, its second hike this year, bringing the deposit rate to 2.50%, the lending rate to 2.90% and the refinancing rate to 2.65%, effective September 16, 2026. It also signaled that it may continue raising rates, with another increase possible as early as October, after war in the Middle East pushed inflation higher and it looks set to stay above the 2% target for a prolonged period. The ECB still expects eurozone inflation at 3.0% this year, 2.5% in 2027 and 2.1% in 2028, while core inflation excluding food and energy prices is expected at 2.5% in 2026, 2.6% in 2027 and 2.3% in 2028. The eurozone economy is expected to expand 0.9% in 2026, 1.4% in 2027 and 1.5% in 2028, with growth forecasts for both 2026 and 2027 revised upward. After the meeting, investors priced a 70% chance that the ECB will raise rates in October, up from around 50% previously. However, sources commented that the market's view that the ECB will hike three more times may be excessive, and that December could be a more appropriate time, since the December meeting will publish a new set of economic projections covering 2029. Eurozone inflation recently hit its highest level in nearly three years, making the ECB the most hawkish central bank among the G7 countries. Economists at Bloomberg Economics believe the camp favoring tighter monetary policy is gaining influence, and based on the ECB's estimates of the neutral rate, the deposit rate may need to rise by at least 2.75%.
ECB raised rates 0.25% and signaled more hikes, pushing the policy rate/yield higher.
ECB's second hike and hawkish guidance lift eurozone yields, including the 10Y Bund yield.
ECB rate hike and hawkish signal strengthen the euro versus the dollar.
