Markets price in four more ECB rate hikes as energy shock hits bond yields
Money markets are betting on four additional quarter-point rate hikes from the European Central Bank over the next 12 months, a repricing that would take the deposit rate to 3.50% from the current 2.50%. The move reflects how investors are adjusting to the inflationary shock from the conflict in the Middle East.
What the market expects
The ECB has already raised rates twice this year: a 25 basis point hike in June and another in September. That brought the deposit facility rate to 2.50%, the main refinancing rate to 2.65% and the marginal lending rate to 2.90%.
Markets now see a 75.1% probability of a hike in October and a 73.3% chance in December. Specifically, traders assign a 61% probability to the deposit rate reaching 2.75% by October and a 48.8% chance of a 50 basis point increase by December, which would push the rate to 3%. Economists surveyed by Bloomberg expect at least one more hike, while UBS analysts forecast an additional quarter-point increase at the 17 December meeting.
Why inflation is sticky
The driver is energy. Brent crude has surged beyond $100 a barrel, trading around $105–110 this month. European gas prices have doubled since June to more than €80 per megawatt-hour, levels not seen since early 2023. The International Energy Agency has linked the spike to geopolitical disruptions, including the conflict in Iran and constraints on the Strait of Hormuz.
ECB staff projections now see headline inflation averaging 3.0% in 2026, peaking at 3.6% in the fourth quarter. Core inflation, excluding energy and food, is forecast at 2.5% for the year. The ECB's chief economist, Philip Lane, has warned that higher energy costs could weigh on private consumption through the end of the year.
Bond markets feel the strain
Government bonds across Europe are selling off. The yield on the 10-year US Treasury has broken above 5%, while the German Bund has risen 13 basis points and the UK Gilt is up 16 basis points.
Italy's 10-year Btp has climbed 8 basis points to yield 4.43%, reflecting higher borrowing costs for the state. The spread between the Btp and the Bund — a measure of Italy's risk premium — reached 88 basis points earlier this month, the widest in three years. Italian auctions on 10 September saw three-year bonds priced at 3.43%, seven-year at 3.98% and 50-year at 4.61%.
What this means for borrowers
For households and businesses in Italy, the repricing signals that borrowing costs will stay elevated. Variable-rate mortgages tied to Euribor will feel the impact of any additional ECB hikes. Companies rolling over debt face higher interest expenses. The question now is whether the energy shock feeds through into broader prices and wages, a risk the ECB has said it is watching closely.
Bank of England signals caution
The Bank of England is taking a different path. While markets had priced in roughly five quarter-point hikes, the central bank held rates at 3.75% in September and announced a six-month pause in its bond sales. Still, the monetary policy committee voted 6–3 to hold, showing a split among members. The BoE warned that rates might need to rise if the Iran conflict persists, with UK inflation expected to exceed 4% early next year.
