Policymakers in Frankfurt lifted the deposit rate to 2.50% on Sept 10 and signaled price pressures will persist well past target, with Lagarde pointing to at least the first half of 2027. Money markets responded by fully pricing three additional quarter-point increases by June 2027, while Bloomberg reported an October move is under consideration. German 10-year yields climbed as much as 6 basis points to 3.51%, a level last seen in 2009.
Another quarter point of tightening landed in Frankfurt on Sept 10, and within hours traders had priced a further 76 basis points of it — a repricing that drove the 10-year German Bund yield to 3.51%, its highest since 2009.
"We believe inflation will be longer lasting than we had anticipated," ECB President Christine Lagarde said at a press conference in Berlin. "The outlook remains highly uncertain, with risks to the upside for inflation and to the downside for economic growth."
The Governing Council lifted all three key rates by 25 basis points in a unanimous vote, effective Sept 16. The deposit facility rate rises to 2.50%, the main refinancing operations rate to 2.65% and the marginal lending facility to 2.90%. Euro-area consumer prices were 3.3% higher in August than a year earlier, the fastest since September 2023 and well above the 2% target, after Brent crude pushed back above $100 a barrel on attacks around the Strait of Hormuz.
Rate-swap markets now fully price three further 25 basis point increases by June 2027, up from two to three moves priced before the meeting. Traders have also begun assigning a probability to a hike as late as end-2027. The rate-sensitive two-year German yield held near 3.072%, close to a more than two-year high, while the Stoxx Europe 600 fell 0.5%.
Bloomberg reported, citing people familiar with the discussions, that officials have put another increase on the table and could act as soon as October. Those people said the ECB may need more restrictive policy to contain inflation running above 3%, while cautioning that market pricing for three more hikes may be too aggressive and that December is the more natural date because the central bank will publish fresh economic projections extending to 2029.
Lagarde declined to endorse any path. "We have not debated at all any kind of future path," she said. "Markets do what they have to do and we do what we have to do — which is to provide price stability."
The ECB raised its 2027 and 2028 inflation forecasts and now sees core inflation climbing into early 2027 before easing in 2028. Staff projections put core inflation at 2.3% in 2028, above the 2.2% penciled in during June, according to Saltmarsh Economics. Lagarde said above-target inflation should last at least through the first half of 2027, with headline returning near 2% around the end of that year.
The forecasts were finalized before the latest leg higher in energy prices, which leaves them stale. Oil is trading in line with the ECB's "adverse" scenario and natural gas is above it, approaching the "severe" case. "Given the recent jump in energy futures prices, unchanged staff forecasts for core inflation for 2026 and 2027 are untenable," said Arne Petimezas, director of research at Dutch broker AFS. "Expect both to be raised and paired with another quarter point hike in December."
Lagarde raised growth forecasts for this year and next, saying the 21-country bloc proved more resilient than feared in the second quarter and that the strength was broad across countries and industries, with momentum likely extending into the third quarter. Employment growth is slowing, and she named energy prices as the main source of uncertainty.
Firmer growth argues for more tightening rather than less, because it makes it easier for companies to pass energy costs through to customers. "Supply shocks are not only multiplying, but it is increasingly likely that demand is also adding to inflation," said Sylvain Broyer, chief EMEA economist at S&P Global Ratings. "The ECB may need to move into restrictive territory and cannot rule out further rate hikes at this stage."
Not everyone reads the same signal. Underlying inflation fell last month, wage indicators remain benign and the labor market is soft, which points to little risk of a wage-price spiral and gives the ECB room to move quarterly rather than at consecutive meetings. "We maintain our baseline of two further 25 basis point rate hikes at quarterly intervals, with the next one in December and the second in March 2027," said Jan von Gerich and Tuuli Koivu, economists at Nordea.
The last time the ECB delivered back-to-back hikes at consecutive meetings was 2023, when the deposit rate ran from 2% in March to 4% by September. Bunds sold off hard through that stretch, and the 10-year yield's move to 3.51% on Sept 10 marks the highest level since 2009 — a repricing that raises discount rates for euro-area real estate, utilities and long-duration growth equities while widening net interest margins for banks.
The next scheduled decision is Oct 29, with the following meeting on Dec 18. A December move would arrive alongside updated projections through 2029, the first full forecast horizon that captures whether the energy shock fades or feeds into wages and services. Commerzbank's Jörg Krämer said he is revising his forecast and now expects another 25 basis point hike in December. Ed Hutchings, head of rates at Aviva Investors, said the market is right that more hikes are coming but that "with two hikes already being delivered and more than a further two hikes priced, things may well have gone too far."
This article is for informational purposes only and does not constitute investment advice.
