Investors Price in Another ECB Rate Hike in September Amid Persistent Price Pressures
Markets are pricing in about a 65% probability of a second consecutive ECB rate hike in September, as high energy prices begin to spill over into services and wages. Analysts believe that even if the June hike was 'insurance,' the ECB may continue tightening if inflation does not start to slow.
September ECB hike is no longer an 'option' but a baseline scenario: why the market is right and analysts are wrong
Author: independent financial analyst
Markets are pricing in about a 65% probability of a second consecutive ECB rate hike in September. The official wording is 'persistent price pressures in services and wages.' But those who actually trade the euro and European bonds see a much more alarming picture. It's not just that inflation is not slowing. It's that core inflation in the eurozone has settled at 2.5%, and services inflation has reached 3.5% — a six-month high.
I will explain why a September hike is almost guaranteed, what mechanisms will force the ECB to act even against falling growth, and give one insight that most investors miss.
[The Gist]: What's Really Happening
The June rate hike to 2.25% was fully priced in by the market before the meeting — the probability was 99.4%. So the real trading idea now is not June, but September. And here, in my view, markets still underestimate the ECB's resolve. 65% probability is too low; the real figure should be closer to 80-85%.
Why? Because the inflation shock from the closure of the Strait of Hormuz has ceased to be purely energy-related. It has spilled over into services through two channels: first, rising transport costs have automatically pushed up prices for tourism, catering, and air travel; second, households have begun demanding compensation for lost real income in the form of higher wages, which has already started to show in collective agreements in Germany and the Netherlands.
A key point many miss: in its scenarios (baseline, adverse, severe, and mild), the ECB concluded that a rate hike was necessary in all four variants. This is not an 'insurance' hike, as Lagarde put it — it is a forced step, without which inflation would remain above target over the entire forecast horizon.
Timeline and Context
To understand why September is almost inevitable, look at the dynamics of key indicators over the past month and a half:
| Indicator | March 2026 (forecast) | May-June 2026 (actual) | Change |
|---|---|---|---|
| Annual HICP inflation | 2.6% (forecast) | 3.2% (actual in May) | +0.6 pp |
| Core inflation | 2.3% (forecast) | 2.5% (actual in May) | +0.2 pp |
| Services inflation | 2.9% (February) | 3.5% (May) | +0.6 pp |
| 3-month EURIBOR | 2.0% (January) | 2.55% (June) | +0.55 pp |
| 10-year Bund yield | 2.2% (March) | 3.03% (June) | +0.83 pp |
Sources:
Particularly telling is the rise in services inflation from 2.9% to 3.5% in just three months. This is the indicator the ECB watches most closely when assessing second-round effects. At her press conference on June 11, Lagarde said no clear second-round effects were visible yet, but acknowledged that risks were being monitored 'very closely.' Translation from diplomatic language: they already see the first signs but don't want to panic markets.
Who Wins and Who Loses
Winners:
Hedge funds betting on rate hikes via short-term EURIBOR futures. The expectation of a September hike is already priced into the curve, but if the ECB goes for a third hike in 2026 (probability estimated at 40-50%), current positions could yield 15-20% returns in 4 months. Deutsche Bank explicitly says the probability of a 2.75% rate is higher than the probability of the cycle ending at 2.25%.
Holders of euro cash via money market instruments. The 3-month EURIBOR has already risen to 2.55% and will continue moving toward 2.80% by year-end if the ECB hikes in September.
Short positions on peripheral European bonds. The widening of the BTP-Bund spread is one of the most reliable trades now. At every hint of tightening, Italian bonds fall faster than German ones.
Losers:
Borrowers with floating rates — small and medium-sized businesses in Italy, Spain, France. Every 25 bps hike adds about €1.5 billion in total interest costs on SME loans in the eurozone.
Real estate funds leveraged in euros. The German commercial real estate sector is already showing initial signs of stress: transaction volumes fell 22% compared to the first quarter, and cap rates have started to rise.
Carry trade traders who borrowed euros to buy Turkish lira or Hungarian forint. With the rise in EURIBOR, the cost of funding such positions has increased by 55 bps since the start of the year, and this trend will continue.
What the Media Isn't Saying
Insight missing from big bank analyses:
The September ECB rate hike has already been indirectly confirmed... by the ECB's own forecasts, but no one has done the simple arithmetic. Look: in its baseline scenario, the ECB assumes a 'technical assumption' — 3-month EURIBOR at 2.8% in 2027 and 2.7% in 2028. Current EURIBOR is 2.55%. To reach 2.8% by 2027, the ECB rate must be hiked at least twice. The logic is simple: EURIBOR is usually 25-30 bps above the ECB deposit rate due to bank credit risk. If the target EURIBOR is 2.8%, the ECB rate should be around 2.5-2.55%. That means from the current 2.25%, two hikes of 25 bps each (2.50% and then 2.75% — either one in September and one in December).
But the most interesting part is in the scenarios. The ECB for the first time published a 'milder scenario' that assumes a rapid fall in energy prices. And even in this scenario, the ECB itself admits that the June rate hike was the right decision. Think about it: even if oil and gas prices collapse tomorrow, the ECB still believes the rate had to be raised. This means the regulator no longer believes in the 'temporary' nature of the energy shock — it views it as a structural shift.
What else is hidden: the ECB's calculations assume that inflation will return to 2% only in 'autumn 2027.' That is another 15-18 months above target. This is not what you will read in headlines, but it is what determines policy: the ECB will tighten until the forecast shows a return to 2% within 12 months.
Forecast: Next 30 Days and 90 Days
Next 30 days (until mid-July 2026):
I estimate the probability of a rate hike at the July 23 meeting at only 30-35% — it's too close to the June hike, and the ECB will want to wait for at least one full inflation data cycle. However, the hawkish rhetoric at the July press conference will be tough. Lagarde will likely say outright that 'the September meeting is a live meeting.' This will cause the euro to strengthen to 1.092-1.095 and a slight drop in European stock indices (Euro Stoxx 50 could lose 2-3%).
Key date: the release of July services inflation data on July 31. If the indicator remains above 3.3%, the probability of a September hike will jump to 80-85% within 24 hours.
Next 90 days (until mid-September 2026):
A September hike of 25 bps (to 2.50%) will occur with 85% probability, unless there is a sharp de-escalation of the Middle East conflict. Moreover, I expect that after the September hike, markets will begin pricing in a third hike in December 2026 or January 2027 with a 40-50% probability. Deutsche Bank already says the chance of a 2.75% rate is higher than the chance of the cycle ending at 2.25%.
What this means for assets:
- EUR/USD: short-term rise to 1.095 by mid-September, but then a possible pullback to 1.078 if eurozone GDP growth data for Q3 comes in weaker than expected (forecast 0.2% q/q).
- Italian BTPs: 10-year yields will reach 3.60-3.70% by end-September, spread to Bunds at 210-220 bps.
- European bank stocks: rebound in July-August on expectations of higher net interest income, then correction in September on deteriorating loan quality.
Editorial Forecast
Asset: short-term EURIBOR futures (December 2026) Direction: yield increase (price decline) Key levels: current market prices in 2.80% for December 2026; target level 2.95-3.00% by end-September with two ECB hikes Confidence level: high Main risk: sudden de-escalation of the Middle East conflict, collapse in energy prices, allowing the ECB to abandon further tightening and limit itself to one hike. Probability of this scenario: no more than 20% over a 90-day horizon.
The editorial opinion is not an investment recommendation. All decisions to buy or sell assets are your own.
— Editorial Team
