Investing.com -- UBS expects the European Central Bank (ECB) to raise rates in December after leaving them unchanged Thursday, though its research and wealth management arms differ on whether more hikes follow.
The ECB held its deposit rate at 2.5%, as widely expected, following September's 25-basis-point increase. UBS Global Research economists led by Reinhard Cluse said they expect a hike to 2.75% on Dec. 17, followed by another, "presumably final," increase to 3% in March. That view rests on their forecast that eurozone inflation will rise from 3.8% in September to a peak of 4.1% in January 2027.
The economists said ECB President Christine Lagarde's press conference "was not outright dovish." Lagarde said the Governing Council discussed whether a hike was appropriate at this meeting but decided unanimously against it.
She said a "measured pace" remains appropriate and that the "direction is clear," while noting the ECB will have more data and new projections by December. "We see all of this as supporting our expectation of another hike in December," the economists said. They also cited a Reuters report in which three ECB policymakers said they expect a hike in December, followed by a pause.
UBS's Chief Investment Office, in a separate note, agreed that a December hike is likely but sees it as the last. Its economists expect rates to stay on hold through 2027, "a more dovish call than markets currently price." The market still prices an additional 75 basis points of hikes.
The energy shock has become larger and more persistent, but underlying inflation is stable, and wages have yet to respond materially, the CIO team said. It said the risks point to more tightening if energy inflation passes through to wages and prices. "If this materializes, then we believe further tightening beyond December" would follow, the economists said.
They also noted that downside risks to growth have increased. Financial conditions have tightened since September as bond yields rise, "not only in France," and higher rates are increasingly visible in lending data. Even so, activity remains resilient, supported by services, AI-related investment, exports and public spending, giving the ECB "scope to remain patient."
Lagarde pointed to global forces behind higher yields but made clear the ECB would eventually step in if the "smooth transmission of monetary policy" were undermined. UBS said the ECB cannot deliver quick, proactive support given moral hazard concerns and is not changing its quantitative tightening policy.
Lagarde also announced she will leave the ECB on Feb. 7, 2027.
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