Deutsche Bank now expects the European Central Bank to raise interest rates by another 25 basis points in December, in addition to an anticipated hike in September, as persistent energy-related risks keep pressure on the euro zone's inflation outlook, Reuters reported.
The bank's research arm had previously forecast the ECB's deposit facility rate would peak at 2.5%, only modestly above its current level of 2.25%. That outlook was based on expectations that the energy price shock would prove temporary and that economic growth would weaken, Reuters reported.
Those assumptions are now being challenged, Deutsche Bank said in a research note on Friday.
A prolonged conflict involving Iran could create further upside risks to inflation, although the euro zone labour market remains relatively soft. There is also limited evidence so far that broader price pressures are translating into stronger wage growth, according to the bank, Reuters reported.
Deutsche Bank now considers 2.75% the more likely terminal rate for the ECB. However, it said rates could peak at 2.5% if geopolitical tensions ease more quickly than expected or economic growth weakens.
A move above 3% would require broader evidence of persistent inflationary pressures, the bank said.
The revised outlook puts Deutsche Bank among a growing number of brokerages expecting additional ECB tightening this year. The shift reflects expectations that borrowing costs in the euro zone could remain elevated for longer as economic growth proves resilient and energy prices continue to pose risks to inflation.
The ECB is scheduled to announce its next monetary policy decision on September 10, with markets widely expecting the central bank to raise rates at the meeting.
