ECB Expected to Deliver One More Rate Hike Before Pivot to Cuts, Commerzbank Says

The European Central Bank (ECB) is likely to raise interest rates one more time before eventually shifting to a cutting cycle, according to a new analysis from Commerzbank. The forecast comes as the eurozone continues to grapple with persistent inflation, though signs of economic weakness are beginning to emerge.

Commerzbank’s Outlook: One Final Hike

Commerzbank economists expect the ECB to deliver a 25-basis-point rate increase at its upcoming meeting, bringing the deposit rate to a peak of 4.00%. This move would mark the final hike in the current tightening cycle, according to the bank’s projections. The decision is seen as a response to still-elevated inflation, which remains above the ECB’s 2% target, particularly in the services sector and due to sticky wage growth.

However, Commerzbank also anticipates that the ECB will begin cutting rates in the second half of 2025, as the eurozone economy slows and inflation gradually retreats. The timing of the first cut will depend on incoming data, especially wage negotiations and corporate pricing behavior.

Why Another Hike Matters

The ECB has already raised rates by 450 basis points since July 2022, the fastest tightening cycle in the bank’s history. A further increase would extend the pressure on households and businesses already facing higher borrowing costs. Mortgage rates, corporate loans, and government bond yields have all risen sharply, weighing on economic activity.

Commerzbank’s analysis suggests that the ECB is prioritizing inflation control over growth concerns in the near term. The bank’s chief economist noted that the central bank is wary of declaring victory too early, especially given the risk of second-round effects from wage increases.

Market and Consumer Implications

For financial markets, the prospect of a final hike followed by eventual cuts creates a complex environment. Bond yields may remain elevated in the short term, while equity markets could react positively to the prospect of monetary easing later in the year. For consumers, the immediate impact is continued higher costs for loans and mortgages, but with the expectation of relief in 2025.

The eurozone economy grew only 0.1% in the fourth quarter of 2024, narrowly avoiding a recession. Germany, the bloc’s largest economy, contracted by 0.3%, raising concerns about the effectiveness of further tightening. Commerzbank’s forecast balances these competing pressures: one more hike to ensure inflation is contained, followed by cuts to support growth.

Conclusion

Commerzbank’s projection of one final ECB rate hike before a pivot to cuts reflects the delicate balancing act facing the central bank. While inflation remains a concern, the weakening economic outlook suggests that the tightening cycle is nearing its end. The actual path of rates will depend on upcoming data, but the message from Commerzbank is clear: the peak is near, and rate cuts are on the horizon for 2025.

FAQs

Q1: When is the next ECB rate decision?
The ECB’s next monetary policy meeting is scheduled for [date], where the decision on interest rates will be announced.

Q2: What is the current ECB deposit rate?
The ECB deposit rate currently stands at 3.75%, following a series of hikes since July 2022.

Q3: How might another rate hike affect eurozone consumers?
Another hike would increase borrowing costs for mortgages and loans, potentially reducing consumer spending. However, it also aims to curb inflation, which benefits purchasing power in the long term.