UBS has revised its outlook for the European Central Bank, saying it now expects another 25-basis-point ECB rate hike in December.
The additional increase would lift the ECB’s deposit rate to 2.75%.
UBS Changes Its ECB Interest Rate Forecast
The ECB raised its deposit rate by 25 basis points to 2.5% on Wednesday, matching market expectations.
UBS economists, led by Reinhard Cluse, had previously expected 2.5% to represent the peak in the current interest rate cycle.
However, the bank changed its forecast following the ECB press conference and the publication of updated economic projections.
UBS now expects the ECB to keep rates unchanged at its Oct. 29 meeting before raising the deposit rate to 2.75% on Dec. 17.
UBS Sees Rates Falling Again in 2027
UBS does not expect the higher rate to remain in place permanently.
The bank forecasts that the ECB will reverse the December increase during the fourth quarter of 2027, bringing the deposit rate back to 2.5%.
Rates are then expected to remain at that level.
However, financial markets are currently pricing in a more aggressive tightening path. According to UBS, current pricing points to around 75 basis points of additional tightening over the next year.
Lagarde Signals Confidence in ECB Rate Increase
ECB President Christine Lagarde said the latest interest rate increase received unanimous support from policymakers.
She argued that the decision was justified across all of the central bank’s updated economic scenarios.
The ECB’s latest forecasts also showed stronger inflation and economic growth expectations than UBS had anticipated.
This came despite higher assumptions for both policy rates and bond yields.
ECB Raises Inflation and Growth Forecasts
The ECB increased its 2027 inflation forecast by 0.2 percentage points to 2.5%.
At the same time, its forecast for eurozone GDP growth in 2027 was raised by 0.2 percentage points to 1.4%.
Core inflation projections were also revised higher.
The ECB now expects core inflation of 2.6% in 2027 and 2.3% in 2028. Both forecasts were increased by 0.1 percentage points.
Meanwhile, the central bank left its assessment of second-round inflation effects from wage growth broadly unchanged.
Inflation Risks Remain Tilted Higher
Lagarde said risks to the eurozone growth outlook remain skewed to the downside.
However, UBS described the ECB’s overall assessment of economic growth and the labor market as relatively constructive.
The ECB also believes risks surrounding inflation remain tilted to the upside, which could support the case for another rate increase later this year.
UBS economists still believe the risk of stronger wage growth creating persistent second-round inflation effects remains limited.
However, they also highlighted significant uncertainty linked to developments in the Middle East.
The revised UBS forecast suggests that interest rates could remain an important driver for the euro, European equities and bond markets as investors reassess the future path of ECB monetary policy.
