The European Central Bank is poised to announce its interest rate decision at 20:15 Beijing time on Thursday, with widespread expectations pointing to a 25-basis-point hike that would lift the deposit facility rate from 2.25% to 2.50%. This marks the second increase since energy prices surged amid the Iran conflict, as inflation runs well above target while the eurozone economy shows surprising resilience. According to a survey, all but one analyst anticipate the ECB will raise the deposit rate by 25 basis points to 2.5% on Thursday.

Fresh quarterly projections are set to reinforce the case for tightening, with eurozone growth accelerating alongside rising inflationary pressures. Policymakers are grappling with consumer price gains that breached 3% last month, the highest level in nearly three years, and are unlikely to ease significantly in the coming months. Unlike the Federal Reserve and the Bank of England, the ECB already raised rates in June, making this week's move all but certain, with attention now shifting to the future trajectory of monetary policy. Markets are pricing in two or more additional hikes, though economists remain skeptical. Divisions within the ECB are also emerging: some officials see scope for further increases beyond this month, while others urge caution given the absence of second-round inflation effects and persistent risks tied to Middle East tensions and US trade policies.

“The ECB will clearly hike this week,” said Jari Stehn, chief European economist at Goldman Sachs. “But the outlook is fraught with massive uncertainty, and some signs of division on the Governing Council mean the rate path is far from clear.” The rate decision is scheduled for release at 2:45 PM Berlin time, with ECB President Christine Lagarde holding a press conference 30 minutes later.

Rate at 2.5% May Hit 'Neutral Ceiling' as Divisions Surface Among G7's Most Hawkish Central Bank

ECB officials have broadly signaled this September hike, which would cement the institution's status as the most hawkish among the Group of Seven central banks. However, views on subsequent moves are split. Lithuanian central bank chief Gediminas Simkus argues that lifting rates to 2.5% won't be enough to bring inflation back to 2%, citing factors such as stronger growth. Meanwhile, ECB Executive Board member Piero Cipollone warns against overtightening monetary policy to avoid harming the economy. Part of the debate stems from the view that 2.5% is widely seen as the upper bound of the neutral range, beyond which economic activity could face restraint.

Not everyone shares this perspective. Ireland's Gabriel Makhlouf believes economic activity would only become restricted once rates exceed 2.75%. Bundesbank President Joachim Nagel notes that officials must also consider the recent rise in global bond yields, which “complicates the situation,” even though tighter financial conditions aid the ECB's fight against inflation. Economists David Powell and Simona Delle Chiaie suggest that “with oil market volatility returning and gas prices surging, hawks will certainly push for another hike in December. However, tighter financial conditions and limited evidence of indirect effects from the energy shock pose significant hurdles for them.”

Economic Outlook: Inflation Forecasts for Next Year Likely Raised, With 2028 Serving as 'Validator' for Rate Hikes

The updated economic projections will be pivotal to Thursday's discussions and the future rate path. Markets expect the ECB to produce a range of forecast scenarios, similar to what it did in March and June. In the baseline case, analysts expect the inflation projection for next year to be revised upward from June's 2.3%, while the 2026 inflation forecast holds at 3%, alongside a stronger growth outlook. “Unless the 2028 projections come in below target, especially on core inflation and inflation excluding energy, this will confirm expectations of slightly more than three rate hikes,” wrote Greg Fuzesi, an economist at JPMorgan, in a report.

However, the ECB's projections may already be somewhat outdated. With the cutoff date set in August, the outlook may not reflect the recent surge in bond yields or higher energy prices.

Lagarde's Future: Speculation Over Early Departure Intensifies

Speculation is mounting over the possibility of Christine Lagarde leaving the ECB before her term concludes. Her remarks following the July rate meeting suggest she may not serve until the mandate ends in October 2027. Media reports last month indicated that the World Economic Forum, known for its annual meeting in Davos, is still courting her for a leadership role, with Lagarde seemingly open to accepting such a position. Lagarde has also recently declined to rule out involvement in French politics, stating, “Whatever role allows me to be most useful, that's what I'll take.” Shortly after her Berlin visit, she is slated to attend an annual political gathering hosted by Hervé Morin, president of the Normandy region and leader of the centrist party.

Pressure on Lagarde could intensify if ECB Executive Board member Isabel Schnabel were to depart early, which would force Lagarde to clarify her own plans. Schnabel's term runs until December 2027, but reports suggest she may be considering a move to the International Monetary Fund.