JPMorgan now expects the European Central Bank to raise interest rates for a third time in December. The move would lift the ECB policy rate to 2.75%.
Before that, the bank sees a second rate hike to 2.5% at next week’s meeting as highly likely.
JPMorgan Turns More Hawkish on ECB Rates
JPMorgan economist Greg Fuzesi said the updated forecast reflects several factors. These include persistent energy-price pressures, stronger economic growth, sticky core inflation, and signs that the ECB’s estimate of the neutral interest rate may be moving higher.
Financial markets are already pricing in the possibility of a fourth rate hike after December. However, JPMorgan has not yet made that scenario part of its central forecast.
Energy Prices Remain a Key ECB Concern
Fuzesi noted that ECB Governing Council comments have closely followed developments in the Middle East.
When tensions appeared to ease, ECB officials generally sounded less hawkish. When the conflict intensified or remained unresolved, policymakers adopted a more cautious stance toward inflation.
For the ECB, a major energy supply shock could strengthen the case for higher interest rates. Although expensive energy may weaken economic growth, it can also add significant inflationary pressure.
JPMorgan believes the chances of a lasting Middle East de-escalation before December have declined. European natural gas prices could therefore remain elevated through the winter.
Euro Area Growth Remains Resilient
Economic growth has also been stronger than JPMorgan previously expected.
The bank had already forecast euro area growth above its longer-term potential this year. However, recent data have proved even more resilient.
Stronger growth could make additional ECB rate hikes easier to justify because the economic cost of tighter monetary policy may be lower.
Core Inflation Is Proving Sticky
Core inflation has also failed to slow as much as JPMorgan expected.
The persistence is not entirely linked to the energy crisis. Other factors, including technology prices and stronger effective wage growth, are also contributing to inflationary pressure.
JPMorgan does not expect these pressures to disappear quickly before the ECB’s December meeting.
As a result, persistent inflation could strengthen the case for another rate increase.
ECB Neutral Rate May Be Moving Higher
Another important factor is the ECB’s changing view of the neutral interest rate.
The neutral rate is the level of interest rates that neither stimulates nor restricts economic activity.
ECB staff had previously worked with an estimate of around 2%. However, some Governing Council members have recently suggested that the neutral rate could now be closer to 2.25% to 2.5%.
If that estimate is correct, a policy rate of 2.75% would only move monetary policy into mildly restrictive territory.
That could make a third ECB rate hike in December easier for policymakers to justify.
A Fourth ECB Rate Hike Could Follow
JPMorgan believes a fourth rate hike could potentially arrive as early as March.
However, several developments could change that outlook.
A de-escalation in the Middle East, lower natural gas prices after winter, or wage growth moving closer to levels consistent with the ECB’s inflation target could reduce the need for further tightening.
For now, JPMorgan expects the ECB policy rate to remain at 2.75% throughout 2027.
The bank also expects any potential ECB rate cut to be delayed until 2028.
What It Means for EUR/USD
Higher-for-longer ECB interest rates could remain an important factor for the euro and EUR/USD.
If markets continue to price additional ECB tightening, the euro could receive support from higher European yields. However, the currency outlook will also depend on Federal Reserve policy, inflation trends, economic growth, and geopolitical developments.
The ECB’s upcoming meetings will therefore be closely watched for further clues about whether policymakers are preparing for a third rate hike and potentially further tightening in 2027.
