The ECB is expected to pause next week but most economists forecast a quarter-point hike in September lifting the deposit rate to 2.5%, with euro zone inflation at 3.2% in May and other central banks also tightening (Bank of Korea 2.75%, Bank of Japan 1%). Global tightening and rising Fed hike odds later in the year (July 10.2%, Sept 50.6%, Oct 60.5%, Dec 72.8%) will drain market liquidity and pose a headwind to crypto and Bitcoin, increasing downside risk for DeFi and other risk assets.

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In Brief

The ECB is expected to hold rates next week then hike once more in September.
Most surveyed economists see a final quarter-point rise to 2.5% in September.
The Bank of Korea and Bank of Japan have also raised interest rates this year.

The European Central Bank (ECB) looks set to keep interest rates steady next week, according to a Bloomberg survey of economists.

However, most expect a quarter-point increase in September, when policymakers receive fresh quarterly forecasts. That move would lift the deposit rate to 2.5%.

ECB Rate Hike Set for September as Global Tightening Widens

Oil prices surged after the Iran war, driving the euro zone’s inflation to 3.2% in May, the highest since 2023. The ECB answered with a June hike.

That step made it the first Group of Seven central bank to raise rates in response to the war. A September increase could cement its status as the most hawkish member of the club.

All surveyed economists predicted no move next week, per the Bloomberg poll. Even so, no analyst offered certainty given the fluid situation in the Middle East.

“The key question now is whether renewed US-Iran tensions prove temporary,” Dennis Shen, a lecturer at TU Berlin’s International School of Management, said.

Shen noted that if tensions remain contained, they would likely reinforce expectations that interest rates will remain on hold. However, a more prolonged disruption could trigger second-round inflationary effects and place renewed pressure on inflation expectations.

Still, not every forecaster expects the ECB to follow through.

“We do not think a September hike is a done deal…If progress towards peace and improved energy supply gets back on track, we think the ECB could ultimately avoid needing to raise rates,” Chris Hare, an economist at HSBC, added.

Economists also see downside risks to the central bank’s June baseline forecasts for growth and inflation this year. However, they expect the outlook to remain broadly balanced over the medium term.

The survey’s median forecast points to the first rate cut in September 2027. Nonetheless, four economists, including Bloomberg’s, expect easing to begin as early as March 2027.

Iran War Reshapes the Global Rate Picture

The ECB is not alone. The Bank of Korea raised its benchmark rate to 2.75% this week, its first hike in more than three years. The Bank of Japan lifted borrowing costs to 1% in June, a nearly 31-year high.

For markets, the Federal Reserve carries significant weight. Cooler US inflation data this week pushed near-term hike odds down sharply.

Fed Rate Hike Odds. Source: CMEFedWatch

The probability of a July increase fell from 34.2% a week earlier to about 10.2%, per CME FedWatch. Later meetings tell a different story. Hike odds climb to 50.6% in September and 60.5% in October. By December, the odds reach 72.8%.

Sustained tightening across major economies drains market liquidity, a headwind for risk assets like Bitcoin (BTC).

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