The European Central bank meets next Thursday, with traders suddenly speculating a rate hike could be on the cards in 2026.
Since policymakers last met in October, there has been more evidence to back up their mantra that policy remains in a “good place”. Having taken further cuts off the table, investors will watch whether the ECB gives them reason to stick with rate hike bets.
Here are five key questions for markets:
1/ What will the ECB do next week?
Hold its key rate at 2% for a fourth straight meeting.
Recent data shows the economy grew 0.3% in the third quarter, much faster than the ECB had forecast in September, and that inflation is proving stickier than expected.
ECB chief Christine Lagarde has already set the tone, repeating her “good place” message this week.
2/ What will the 2028 inflation forecast show?
Inflation returning to the 2% target or a little higher, economists expect.
It’s the first time the ECB will forecast for 2028. A return to target should strengthen policymakers’ argument that an inflation slump expected over the next two years will be temporary.
Part of the reason is the postponement of the EU’s new emissions trading system to 2028 from 2027, which also means inflation may be revised further below target in 2027, economists said.
For this year and next, some expect inflation to be revised higher. And Lagarde has already pointed to an upward growth revision.
“The forecasts will provide more hawkish signals,” said Schroders economist Irene Lauro.
3/ What will ECB policy look like next year?
Traders reckon the ECB will keep rates steady, but are now pricing in a roughly 30% chance that it will hike rates by the end of 2026. Just last week a cut was the tail risk.
Hawkish policymaker Isabel Schnabel saying the next move could be a hike fuelled the shift in expectations on Monday, though she said it wouldn’t come soon.
What policymakers, dovish or hawkish, seem to agree on is that rates are likely to stay on hold in the foreseeable future – as do economists polled by Reuters.
Much depends on how much German fiscal stimulus boosts growth, whether the euro – up 13% this year – appreciates further, and how much lower energy prices and cheap Chinese goods weigh on inflation.
“German fiscal stimulus and the EU-wide defence spending will be almost fully offset by the drag from higher U.S. tariffs,” said Vanguard senior economist Shaan Raithatha, who said the risk is still further rate cuts.
4/ What do Ukraine talks mean for the ECB?
If a peace deal emerges, it should support European growth and lower energy prices. But the immediate economic impact won’t change the ECB’s thinking, economists said.
“We should remember Europe has made it clear it doesn’t want Russian gas again,” said Schroders’ Lauro.
An EU plan to use frozen Russian assets to fund a loan to Ukraine is a concern for the ECB if it damages the euro’s standing when policymakers want to boost its status as a reserve currency.
For now, there’s no sign in financial markets that the euro is bothered.
Lagarde previously called the use of the assets legally and financially “stretched”, but has since said the latest plan is the closest to complying with international law.
5/ What do we know about ECB’s board revamp?
The ECB has kicked off a two-year process that will replace most of its executive board, starting with Vice President Luis de Guindos early next year.
A number of smaller countries have thrown their hats into the race, suggesting that a smaller nation, possibly for the first time from the east, may get a chance.
But the next three seats are more important and include the presidency. Bigger economies are likely to continue dominating the board.
The process is not expected to have a material impact on ECB policy, with markets more focused on changes at the U.S. Federal Reserve.
Morgan Stanley’s chief Europe economist Jens Eisenschmidt said Lagarde had given the ECB Governing Council a stronger voice than in the past, taking on more of a moderating role among her peers.
Any new president is likely to continue that approach, although the degree will probably differ, he added.
(Reporting by Yoruk Bahceli and Stefano Rebaudo)
