ECB Poised for Rate Hike as Market Focus Shifts to Future Policy Path

The European Central Bank is set to deliver another interest rate hike on Thursday to combat persistent inflation, but growing divisions among policymakers and speculation about President Christine Lagarde's future are shifting market focus toward the bank's forward guidance.

September Hike Seen as a Done Deal

A rate increase this week is viewed by markets as a near certainty. A survey cited by Investing.com showed that all but one analyst expects the ECB to raise its deposit facility rate by 25 basis points to 2.50%. The decision comes as consumer price inflation runs well above the bank's target, having surpassed 3% last month, while the Eurozone economy has proven surprisingly resilient.

This would mark the bank's second consecutive rate hike in its current cycle, aimed at taming inflationary pressures that have been exacerbated by high energy prices. The interest rate decision is scheduled for release at 2:15 p.m. CET, followed by a press conference with President Lagarde 30 minutes later.

Divisions Emerge on Future Rate Path

While this week's move is widely anticipated, the path forward is much less clear. The ECB's Governing Council appears divided on whether further tightening will be necessary, creating significant uncertainty for investors.

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• Hawkish members, like Lithuania's central bank governor Gediminas Šimkus, have argued that a rate of 2.5% will be insufficient to bring inflation back to the 2% target, citing stronger-than-expected economic growth.
• Dovish members, including Executive Board member Piero Cipollone, have urged caution, warning against over-tightening monetary policy in a way that could damage the economy.

Much of the debate centers on the neutral rate—the level at which policy neither stimulates nor restricts the economy. Some officials view 2.5% as the upper bound of this neutral range. However, others, like Ireland's Gabriel Makhlouf, believe policy only becomes restrictive above 2.75%. "The ECB will clearly hike this week," said Jari Stehn, chief European economist at Goldman Sachs, in a comment to Investing.com. "But there is significant uncertainty about the outlook and signs of some cracks appearing in the Governing Council, meaning the outlook for rates is not clear."

Economic Projections and Lagarde's Future

The ECB's new quarterly economic projections will be critical to Thursday's discussions. Analysts expect the bank's baseline scenario to show an upward revision to next year's inflation forecast and project stronger economic expansion. According to a report from JPMorgan economist Greg Fuzesi, the new 2028 inflation forecast will serve as a key "verifier" for the future rate path.

A further layer of uncertainty involves speculation about President Lagarde's tenure. Reports have emerged that she may not serve out her full term, which ends in October 2027, amid interest from the World Economic Forum and her own refusal to rule out a future role in French politics. This adds a political dimension to the bank's long-term policy outlook.