Hawkish sentiment is rising again! Markets are betting on the ECB raising interest rates three more times by mid-next year, with reports suggesting officials are considering a move as early as October.

Following the ECB's latest rate hike, market bets on further tightening have clearly intensified. The interest rate swap market has now fully priced in three more rate hikes by 25 basis points each by the middle of next year, totaling approximately 76 basis points by June next year ; previously, the market had only fully priced in three rate hikes by October next year.

Meanwhile, according to Bloomberg, citing sources familiar with the matter, European Central Bank (ECB) officials have considered further interest rate hikes, with another increase possible as early as October. The sources stated that to curb persistently high inflation (above 3%), the ECB may need to adopt a tighter monetary policy. However, market bets on three more rate hikes may be too aggressive; December might be a more appropriate time to raise rates, as the ECB will release its latest economic forecasts covering 2029 at that time.

The bond market also quickly reflected expectations of policy tightening. The yield on German 10-year government bonds rose as much as 6 basis points to 3.51%, a new high since 2009.

Energy shocks have fueled inflation expectations, and markets are betting that the ECB may raise interest rates further.

On September 10, the European Central Bank's Governing Council announced a 25 basis point increase in all three key interest rates, in line with market expectations. The decision will take effect on September 16, at which time the deposit facility rate, the main refinancing operation rate, and the marginal lending facility rate will rise to 2.50%, 2.65%, and 2.90%, respectively.

In its statement, the European Central Bank said the ongoing conflict in the Middle East is creating inflationary pressures, and inflation is expected to remain significantly above target for an "extended period of time." Lagarde further stated at a press conference in Berlin that "extended period of time" means at least until the first half of 2027, with overall inflation expected to return to near the target level around the end of 2027.

Lagarde also stated that despite the adverse effects of the energy shock, the eurozone economy demonstrated resilience in the second quarter, with economic growth spanning across countries and sectors, a trend likely to continue into the third quarter. However, job growth is slowing, and while the recent economic outlook has improved, energy prices remain a significant source of uncertainty.

The decision to raise interest rates was unanimously approved. Lagarde stated that the ECB has redefined three scenarios: mild, adverse, and severe, with a focus on assessing energy price shocks. Under all three scenarios, the decision to raise rates by 25 basis points is "valid." At the same time, the ECB revised its inflation forecasts for 2027 and 2028 upwards, anticipating that core inflation will continue to rise until early 2027, before slowing down in 2028.

The market is even starting to price in the possibility of the European Central Bank raising interest rates again by the end of 2027, indicating that investors are reassessing the ECB's future policy path against the backdrop of energy shocks pushing up inflation expectations.

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