Deutsche Bank sees ECB raising rates one final time in December

The prospect of a final hike in December primarily influences the short end of the euro curve, leaving Euribor, €STR futures and yields on one-to-two year government bonds most vulnerable to repricing. Containing rate expectations might dampen volatility at the longer end, whereas short-term instruments remain responsive to every inflation release. Energy prices act as the variable that could tip the balance; additional increases in oil and gas costs would reinforce the argument for tighter policy and potentially lift the euro. The upcoming leadership transition introduces a policy risk premium into 2027, which could pressure the single currency should the succession process turn politically contentious.

Earlier reports:

• InvestingLive Americas market wrap: ECB holds, sources report December hike

According to Deutsche Bank, the ECB still has one rate increase remaining, and the upcoming personnel changes are less significant than the trajectory of energy costs.

Summary of key points:

• Deutsche Bank predicts a single additional rate hike in December, which it considers likely to be the final move of the cycle.
• The bank argues that the tightening already implemented combined with stricter financial conditions might prove insufficient if energy prices continue to climb.
• On Thursday, the ECB kept all three key rates unchanged, leaving the deposit rate at 2.5%, in line with Deutsche Bank's forecast.
• President Christine Lagarde is set to depart in February, Isabel Schnabel leaves in January, and Philip Lane's term expires in May.
• According to Deutsche Bank, the leadership changes increase uncertainty about the policy path but do not automatically change it.
• Klaas Knot and Pablo Hernández de Cos are among the earliest candidates to replace Lagarde.

Deutsche Bank forecasts a final ECB interest rate increase in December. The bank contends that the tightening already carried out may fail to control inflation if energy costs continue to increase.

This assessment comes after Thursday's ECB meeting, where officials kept all three key rates unchanged, with the deposit rate staying at 2.5%. Deutsche Bank had anticipated this pause, characterizing it as a calibrated answer to the energy price shock. Following the decision, the euro and euro area bond yields declined.

Mark Wall, Deutsche Bank Research's chief European economist, stated that the rate increases implemented thus far are probably inadequate by themselves if energy costs keep transmitting into consumer prices, even when combined with the financial tightening observed since September. Consequently, the bank continues to anticipate a final increase in December, which it views as the probable conclusion of the ongoing tightening cycle.

Wall also recognized that predicting the ECB's course has grown harder, partly due to a series of leadership transitions at the central bank. President Christine Lagarde is stepping down in February, about nine months before her eight-year term was scheduled to conclude in October 2027. She becomes only the second ECB president to depart prematurely. Executive board member Isabel Schnabel is also leaving a year early, in January, to assume a senior position at the International Monetary Fund. Chief economist Philip Lane's mandate ends in May.

The contest to replace Lagarde has already begun. The Netherlands is endorsing former Dutch central bank chief Klaas Knot, while Spain is supporting Pablo Hernández de Cos, the Bank for International Settlements' general manager and a former Bank of Spain governor.

Wall questioned if the leadership shifts would change policy-making. He contended that the ECB as an institution is larger than any individual president and that a new leader does not automatically imply a different interest rate trajectory.

If Deutsche Bank's forecast proves accurate, the December increase would cap short-term rate expectations and redirect the discussion from the peak rate level to how long rates remain elevated. The tone of the new leadership in 2027 would then become the central focus for markets.