Europe expected to raise interest rates this week - what is ahead?

Thursday sees the ECB (European Central Bank) interest rate decision wit expectations firmly behind a rate hike. Expectations of future moves are explored by Deutsche Bank below. With Western economies all expected to be in a rate-hiking cycle these future expectations become very important for currency moves.

Deutsche Bank’s Mark Wall and Michael Kirker report that survey respondents expect the European Central Bank (ECB) to continue hiking, with a strong bias toward another move in September and a terminal rate between 2.50% and 3.00%. Views on the timing of the next cutting cycle are spread from Q2 2027 to 2028 or later, and concerns about overtightening have eased since June.

"Terminal rate – Respondents are divided on how far the ECB will go in this hiking cycle. 31% see 2.50% as the terminal rate, 37% see 2.75%, and 26% see 3.00%. The share expecting the ECB to hike too much has also declined from 71% in June to 56% in this survey."

"Current market pricing implies that the ECB should hike to around 3% by the middle of next year. Respondents to our survey are divided as to how far the ECB will go with this hiking cycle. Views on where the terminal rate will be are fairly evenly split across 2.50% (31%), 2.75% (37%) and 3.00% (26%)."

"There is also uncertainty about when the next rate cutting cycle will begin. Views are fairly evenly divided across Q2 2027 to Q4 2027 (20%-26%), with 23% expecting the cutting cycle to begin in 2028 or later."

"A little over half (56%) of respondents think that if the ECB was to make a policy mistake, it would be that the ECB hikes rates too much. This share is down from 71% in our June survey. The share who think the ECB won't hike enough has increased from 13% to 22%."