ECB shifts stance! Will interest rate hikes resume in 2026?

ECB Governing Council member Simkus stated that, due to stronger-than-expected economic activity and inflation, there is no need for further rate cuts.

The Lithuanian central bank governor said on Tuesday that the downside risks facing the 20 countries of the eurozone are not as severe as feared, citing recent upward revisions to third-quarter gross domestic product (GDP) as evidence.

“Our inflation rate is more or less close to the 2% target in the medium term, which indicates there is no need to change interest rates, not only at the next meeting in December, but also at future meetings,” Simkus said in an interview in Vilnius.

These remarks represent a shift in Simkus’s stance. In October, he had stated that the likelihood of inflation falling below the ECB’s 2% target was greater than the likelihood of it exceeding it, and urged his Governing Council colleagues not to rule out a ninth rate cut in this cycle.

On Wednesday, investors ruled out the possibility of an ECB rate cut in 2026, instead increasing their bets on tightening. They now see a 50% chance of the central bank raising rates next year.

“The latest data show that the risks we face in terms of inflation and GDP are fairly balanced,” Simkus said. This could mean that the next policy decision, scheduled for December 18, “will not be a difficult decision.”

In fact, policymakers now seem to have reached a broad consensus: for the foreseeable future, inflation will remain close enough to its target, and the economy is strong enough to withstand headwinds such as trade and the conflict in Ukraine.

Executive Board member Schnabel previously stated that she felt “quite comfortable” with investors’ bets that the ECB’s next rate move would be a hike, although “not in the short term.”

Her remarks on Monday prompted markets to start trimming their remaining bets on further ECB easing, which subsequently triggered similar repricing globally.

Another Governing Council member, French central bank governor Villeroy, also refuted Schnabel on Wednesday, saying, “Based on what we see today, there is really no reason to envisage a rate hike in the near future, contrary to some rumors and speculation that may be heard.”

Similarly, Simkus also stated that it is too early to consider a rate hike now, and said there is “no evidence” that inflation will exceed the 2% target. He said:

“What the past few years have taught us is not to sketch out very distant prospects, nor to assert that things will happen this way or that.”