Key Notes
- UBS now expects quarter-point ECB rate hikes in December 2026 and March 2027, lifting its projected deposit-rate peak to 3%.
- The bank still forecasts an October 29 pause, while official September inflation data show euro-area prices rising 3.8% annually.
- The ECB has not committed to a rate path, and financial stress or a renewed energy shock could change the outlook.
UBS Group AG (SIX: UBSG) now expects the European Central Bank to raise interest rates in December 2026 and March 2027, extending its forecast tightening cycle into next year as eurozone inflation picks up.
The bank sees quarter-point increases taking the deposit rate to 2.75% in December and 3% in March, Investing.com reported on October 19. It previously expected the cycle to end in December.
The revision pushes the bank’s expected peak three months later than before. It also prolongs the prospect of elevated financing costs for European borrowers, although the forecast is a bank assessment rather than an ECB commitment.
October Pause Still Expected
Economists led by Reinhard Cluse still expect the ECB to leave rates unchanged on October 29. Their revised outlook favors March 18 for the additional increase, while allowing for an earlier move on February 4 if conditions warrant.
The ECB’s official meeting calendar confirms the relevant decision dates: October 29 and December 17 this year, followed by February 4 and March 18 in 2027.
The change concerns how long tightening might continue, rather than a prediction that policymakers will raise rates at every meeting. That distinction matters for money markets, where expectations about both the eventual peak and the timing of individual decisions influence short-term yields.
Inflation Remains Above the ECB’s Target
Eurostat’s final September figures, released October 16, confirmed annual euro-area inflation at 3.8%, up from 3.2% in August. Consumer prices rose 0.6% during the month, while core inflation excluding energy, food, alcohol and tobacco was 2.5% annually.
Energy contributed 1.71 percentage points to the headline annual rate and services another 1.52 points. Those contributions show why policymakers must assess both the direct energy shock and whether price pressures are becoming more persistent elsewhere.
As we previously reported, the initial September estimate had already highlighted the gap between rapidly rising energy prices and a smaller increase in core inflation. The final release leaves the headline reading unchanged.
UBS has also lifted its own inflation outlook and now expects annual price growth to reach about 4% in January 2027. That projection helps explain why its economists have added a further increase to their interest-rate forecast.
A contribution in percentage points measures how much a component adds to overall inflation; it is not that component’s own inflation rate. The distinction helps explain why a relatively small part of household spending can still exert substantial pressure on the total index.
The ECB Has Not Committed to More Increases
The ECB’s last decision, announced September 10, raised all three key rates by 25 basis points. The deposit rate reached 2.5% on September 16, alongside refinancing and marginal lending rates of 2.65% and 2.9%.
At that meeting, staff projected average headline inflation of 3% in 2026, 2.5% in 2027 and 2.1% in 2028. Those are annual averages, whereas September’s 3.8% figure compares prices in one month with a year earlier. They should not be treated as interchangeable measures.
President Christine Lagarde’s September statement emphasized that decisions would depend on incoming data and be taken meeting by meeting. The central bank has not promised a particular interest-rate path.
Its assessment links the inflation outlook to underlying price pressures and the way monetary policy is reaching households and businesses. A stronger energy shock could support the case for tighter policy, while weaker demand or sharper financial stress could pull in the opposite direction.
Bonds, Banks and Borrowers Face Different Effects
A higher projected policy peak can lift the returns investors demand from newly issued debt. Existing fixed-rate bonds generally lose value when comparable market yields rise, although an individual forecast revision does not establish that prices have moved or explain an entire trading session.
For households, the effect depends on the loan. Floating-rate borrowing can adjust as its reference rate changes, while an existing fixed mortgage usually retains its agreed rate until a refinancing or reset. New borrowing may become more expensive before the ECB actually acts if markets anticipate the move.
Banks face a mixed picture: higher lending income can help, but deposit competition, weaker credit demand and borrower stress can offset that benefit. The euro’s response also depends on interest-rate expectations elsewhere and the region’s growth outlook.
European governments face the same need to refinance at prevailing market rates. We reported on Italy’s fiscal challenges earlier this month, including how higher yields gradually affect financing costs as debt matures and is replaced.
Financial Conditions Could Change the Forecast
UBS identifies risks on both sides: tighter financial conditions or French market stress could end the cycle sooner, while renewed energy disruption could require more increases. Its latest outlook therefore raises the projected peak without making it certain.
The October 29 meeting will provide the next policy assessment. Inflation releases, wage developments and credit conditions will then help determine whether the December and March sequence remains plausible. For markets, the key change is that UBS no longer sees December as the final step.
