JPMorgan now expects the European Central Bank (ECB) to raise interest rates for a third time in December, lifting the policy rate to 2.75%, after a second hike to 2.5% that the bank views as "near-certain" at next week's meeting. The call extends what has been one of the fastest tightening cycles in the ECB's history: the central bank raised rates in July for the first time in 11 years, ending an eight-year stint of negative rates, and followed with a larger-than-expected 75 basis-point move in September as inflation across the euro area climbed to record highs.

Economist Greg Fuzesi said the forecast reflects the interaction of more persistent energy price pressures, solid growth, sticky core inflation, and a neutral rate that the ECB sees edging higher. Markets are already largely pricing in a fourth hike beyond that, although Fuzesi noted this remains outside JPMorgan's base case.

According to Fuzesi, ECB Governing Council commentary has tracked the Middle East conflict closely, turning less hawkish whenever the crisis appeared to de-escalate and more hawkish when it did not. "For the ECB, an energy supply shock is a net hawkish event, as any offset from weaker growth is partial," he wrote, adding that the odds of a durable de-escalation by December have "progressively receded" and that European natural gas prices are likely to remain elevated through the winter. The framing echoes the ECB's experience following Russia's invasion of Ukraine, when surging gas and electricity prices drove euro area inflation to double digits.

Growth has also surprised to the upside relative to JPMorgan's pre-war forecast, which had already anticipated above-potential euro area growth this year. Fuzesi said solid growth "reduces the risk or cost of hiking rates" for the ECB.

Core inflation, meanwhile, has not moderated as much as expected. Fuzesi said this is not solely the result of the energy crisis but also reflects factors including technology prices and more persistent effective wage growth — pressures he said are unlikely to resolve "in a benign way" by December.

The economist also pointed to a shift in the ECB's approach: while June's hike was stress-tested against a milder scenario, July's meeting minutes suggested that future moves may not need to clear that same bar. He added that at least two Governing Council members have recently signaled that the neutral rate estimate could be moving up toward 2.25%–2.5%, from the roughly 2% level ECB staff had previously used — meaning only a third hike in December would put the policy rate into mildly restrictive territory.

A fourth hike could come as soon as March, Fuzesi said, though a Middle East de-escalation, a gas market emerging from winter, and wage data nearing target-consistent levels could complicate that debate. JPMorgan now expects the policy rate to hold at 2.75% throughout 2027, with any rate cut pushed back to 2028.

Source: Investing.com