ECB signals another rate hike as inflation nears 4%

European Central Bank officials are laying the groundwork for another interest rate increase as soon as October, after a fresh consumer survey showed inflation expectations climbing and energy costs continue to surge due to the Iran conflict.bloomberg+1

The ECB raised its deposit rate by 25 basis points to 2.50% on September 10, its second hike since June, as euro zone inflation hit 3.3% in August — the highest since September 2024 — driven largely by energy prices that jumped 14.3% year-over-year. Bloomberg reported Friday that policymakers are now signaling a further move is possible at their October 29 meeting, with inflation in the 21-nation bloc "barreling toward 4%".ecb.europa+3

Rising Expectations

An ECB consumer survey published Friday showed the median expectation for inflation over the next 12 months rose to 3.0% from 2.9% in July, according to Reuters. Longer-term gauges also climbed: three-year expectations increased to 2.9% from 2.7%, and the five-year outlook edged up to 2.5% from 2.4%. The ECB noted that "uncertainty about expectations for inflation over the next 12 months decreased, but remained higher than the level prevailing before the start of the conflict in the Middle East".reuters+1

Market pricing already implies a 75.1% probability of a rate increase in October and a 73.3% probability in December, according to Morningstar. ECB staff projections released alongside the September decision see headline inflation averaging 3.0% in 2026, 2.5% in 2027, and 2.1% in 2028. Goldman Sachs The Goldman Sachs Group, Inc. ↘ 1.00% expects headline inflation to peak at 3.4% in the fourth quarter of this year.global.morningstar+2

Political Pushback

Not everyone is convinced further tightening is the right response. Italian Finance Minister Giancarlo Giorgetti said Friday that rate hikes alone cannot tame an inflation surge rooted in supply disruptions rather than excess demand. "Inflation stems from a supply shock, not so much from an overheated economy and excessive demand, which would need to be tempered by restrictive monetary policy," Giorgetti said, according to Bloomberg. "Certainly this can help, but by itself it doesn't solve the problem."bloomberg

The Energy Factor

The conflict in Iran has sent energy costs sharply higher across Europe, with energy inflation in the euro zone accelerating to 14.3% in August from 10.3% in July, according to Eurostat. Core inflation, which strips out energy and food, actually dipped to 2.4% from 2.5% in August — underscoring Giorgetti's argument that the price surge is concentrated in supply-driven components rather than broad-based demand pressures. The ECB's next policy meeting on October 29 will test whether hawks can sustain momentum for a third hike this year.europa+1