ECB signals high chance of December rate hike

European Central Bank Governing Council member Ante Zigman said there is a “rather big chance” that euro area interest rates will rise again in December, signaling a strong likelihood of another policy tightening at the next meeting. Speaking on Thursday in Opatija, Croatia, he said inflation continued to climb in October and that a December move would be the third rate increase since the Iran war began.

The ECB most recently kept its key policy rate at 2.5% at its October 29 meeting, after raising it by 25 basis points in September. The next decision is due on December 17, when policymakers will consider whether to respond to the latest inflation data with an additional increase.

Euro area annual inflation accelerated to 4.0% in October from 3.8% in September, the highest level in about three years. Every member economy recorded inflation above the ECB’s 2% target, underlining the breadth of price pressures across the currency bloc.

Energy costs were the main contributor, with the energy component rising 20.8% from a year earlier, up from 18.9% in September. Services inflation edged up to 3.3% from 3.2%, while prices for food, alcohol and tobacco increased by 1.6% and non-energy industrial goods by 1.2%.

Price developments varied widely across the 21 member economies. Lithuania recorded the highest inflation rate at 6.1%, followed by Bulgaria at 6.0%, and Greece and Italy at 5.6% each. Malta had the lowest rate at 2.3%, with Germany at 2.8% and Slovakia at 2.9%.

Financial markets have moved to price in a high likelihood of further tightening. Money markets put the probability of a December rate increase at about 72%, slightly higher than just before the latest inflation figures were released. Market pricing is consistent with the growing expectation that policymakers will act again to counter elevated inflation.

A survey of 73 economists conducted in early October showed that 64 respondents expected the ECB to raise rates in December. Zigman’s remarks followed comments by Bundesbank President Joachim Nagel, who said a December increase would very likely be necessary, reinforcing the perception that another hike is the baseline scenario among many observers.

Despite the rising headline rate, several indicators point to a potentially limited further tightening path after December. Policymakers have described underlying inflation and wage growth as broadly stable, suggesting that price pressures outside volatile components such as energy are not accelerating rapidly.

The October inflation reading matched the median forecast of economists, indicating that the recent data did not significantly surprise expectations. Officials were reportedly expecting a pause after a December increase, in part because higher bond yields are weighing on growth.