Europe's Central Bank Set to Raise Interest Rates One More Time, Then Stop

Europe's main bank, called the European Central Bank (ECB), is expected to raise interest rates on September 10. A new survey of 65 economists published by Reuters on Thursday says this will likely be the second and final rate increase in this round of hikes. If that happens, it would be the shortest rate-hiking period the ECB has had in 15 years. The goal of raising rates is to slow down rising prices, also known as inflation.

Interest rates are the cost of borrowing money. When a central bank raises rates, it becomes more expensive to take out loans. This usually slows down spending and helps bring prices down. The ECB has been raising rates because prices in Europe have been going up faster than the bank's target of 2%.

In August, inflation in the euro zone — the group of countries that use the euro as their currency — rose to 3.3%. That is higher than the ECB's goal, but most of the price increases came from energy costs, not from a wide range of goods. Most economists in the survey said that energy price jumps are not likely to cause broad inflation across the whole economy.

All 65 economists surveyed said they expect the ECB to raise its deposit rate by a quarter of a percentage point, bringing it to 2.50%. A deposit rate is the interest rate banks earn when they store money at the central bank. This number was predicted by more economists than in past surveys, showing growing agreement about what the ECB will do.

After September, most experts think the ECB will stop raising rates. About 91% of those surveyed believe the deposit rate will stay at 2.50% through the end of this year. Around 78% think it will stay the same through the middle of next year, too. Economists believe inflation should slowly get closer to the 2% target during the course of next year.

One reason the ECB may stop hiking is the risk of causing a recession — a period when the economy shrinks and people may lose jobs. Carsten Brzeski, an economist at a bank called ING, said it is hard to imagine the ECB wanting to add more pressure to an already weak economy. He pointed to rising government debt and climbing bond yields as problems that already exist. Raising rates more could make things worse.

The situation in the Middle East has also added uncertainty. A war in Iran could push up oil and gas prices even more. Higher fuel and food prices are very visible to everyday shoppers, which can cause people to expect more inflation in the future. If workers then demand higher wages to keep up, that could push prices even higher — a cycle economists call 'wage slippage.'

Economists in the poll raised their inflation forecast for 2026 to 2.9%, the biggest upward change seen in a year since 2022. They also don't expect inflation to return fully to the ECB's 2% target until late 2027. That means Europeans may continue to deal with higher-than-normal prices for several more years.

If the ECB raises rates just twice and stops, it would match what happened back in 2011. That year, the bank raised rates twice in response to rising oil prices, then stopped. Many experts now look back at those 2011 rate hikes as a mistake, since the economy was not strong enough to handle them. The ECB will be hoping to avoid repeating that error.

The poll also predicts that Europe's economy will grow by 0.8% this year and by 1.2% in 2027. That is slow but positive growth. For now, ECB leaders do not seem eager to signal more rate hikes after September, as long as long-term inflation expectations remain steady and the economy stays on its current path.