JPMorgan Sees ECB Raising Rates to 2.75% in December

JPMorgan now expects the European Central Bank (ECB) to raise interest rates for a third time in December, lifting its policy rate to 2.75% as persistent inflation, higher energy costs and resilient eurozone growth strengthen the case for tighter monetary policy.

The bank expects a second ECB rate hike to 2.5% at next week’s meeting, describing that move as “near-certain.” JPMorgan economist Greg Fuzesi said the December forecast reflects continued energy price pressures, sticky core inflation, stronger-than-expected economic growth and signs that the ECB’s estimate of the neutral interest rate is increasing.

Financial markets are largely pricing in another rate increase after December, although a fourth hike is not currently part of JPMorgan’s base-case outlook.

Fuzesi said ECB policymakers have closely followed developments in the Middle East conflict, with their tone becoming less hawkish when tensions ease and more hawkish when escalation risks increase. For Europe, an energy supply shock can reinforce inflationary pressures even if it also weighs on economic activity.

The chances of a lasting Middle East de-escalation before December have diminished, according to Fuzesi, while European natural gas prices could remain elevated throughout the winter.

Eurozone economic growth has also performed better than JPMorgan expected before the conflict. Stronger growth gives the ECB greater flexibility to raise borrowing costs because the economic impact of additional monetary tightening may be easier to absorb.

Meanwhile, core inflation has remained more persistent than anticipated. Fuzesi pointed to technology prices and sustained wage growth as additional factors behind inflation pressures, suggesting they may not ease sufficiently before December.

JPMorgan also sees evidence that the ECB’s neutral rate estimate could be shifting higher. Some Governing Council members have indicated it may now be around 2.25% to 2.5%, compared with the roughly 2% level previously used by ECB staff.

A fourth ECB rate hike could potentially arrive as early as March, but easing Middle East tensions, lower post-winter gas prices and softer wage growth could reduce the need for further tightening. JPMorgan expects the policy rate to remain at 2.75% throughout 2027, with the next ECB rate cut delayed until 2028.