The European Central Bank left interest rates unchanged at its latest meeting, but economists at Deutsche Bank believe the hiking cycle isn't quite over. In a note to clients, the bank's research team said it expects one final rate increase in December, which would likely mark the end of the current tightening campaign.
The ECB's decision to hold all three key rates steady was widely expected, but the accompanying statement and press conference offered little clarity on what comes next. Christine Lagarde, the ECB president, also confirmed that she will step down in early February 2027, adding a longer-term question about the central bank's leadership.
Why Deutsche Bank still sees a hike
Mark Wall, Deutsche Bank Research's chief European economist, said the ECB's path is getting harder to read. Even after the hold, his team argues that the rate increases already delivered—combined with tighter financial conditions since September, meaning borrowing has become more expensive across the economy—may still not be enough if energy prices keep pushing inflation around.
That's why Deutsche Bank still expects one more increase in December. Wall called that move the likely end of the hiking cycle, suggesting that policymakers may need one final nudge to ensure inflation is firmly on a downward path.
The ECB has been battling inflation that, while cooling from peak levels, remains above its 2% target. Energy prices have been a key driver of price pressures in the eurozone, and any renewed spike could complicate the central bank's efforts.
The Lagarde exit: a leadership question
There's also a longer-dated wrinkle: Lagarde's planned exit raises questions about how a leadership change could shape the tone of policy debates in 2027. But Wall stressed that the ECB is designed to be bigger than any one president, so a shift at the top doesn't automatically mean a shift in the destination for rates.
Central bank leadership changes can sometimes bring shifts in communication style or policy preferences, but the ECB's institutional framework and its mandate to maintain price stability tend to anchor policy regardless of who sits in the president's chair.
What it means for investors
Deutsche Bank's December call puts a tighter frame around short-term euro rates. If traders start treating December as the "last hike," that effectively marks a ceiling for what markets expect over the next few ECB meetings. That matters most for the eurozone "front end"—things priced off near-term policy expectations, like Euribor and €STR futures and 1- to 2-year government bond yields.
With that ceiling in place, surprises in inflation data tend to move pricing away from "how much higher can rates go?" and toward "how long will they stay high?" In practice, that can shift volatility toward those short-dated contracts while leaving longer-term bond yields less reactive, since the long end is driven more by growth expectations and long-run inflation than by the next meeting or two.
For everyday investors, this means that short-term euro interest rates may have limited upside from here, but the path of rate cuts—when they eventually come—remains uncertain. Bond investors should watch for shifts in the front end of the curve, while equity investors might see less pressure from rate expectations if the hiking cycle truly ends in December.
The ECB's next move will also be watched in the context of other central banks. The Federal Reserve has held rates steady recently, but long-term Treasury yields have hit two-decade highs, as we reported earlier. Meanwhile, the Bank of England is facing similar inflation pressures, with UK mortgage approvals hitting their lowest since December 2023 as borrowing costs bite.
Deutsche Bank's call is just one forecast, and the ECB's actual decision will depend on incoming data, particularly inflation readings and economic growth. But for now, the bank's view suggests that the end of the hiking cycle is in sight—just not quite yet.
