The European Central Bank's current rate-cutting cycle is largely nearing its end. Many industry experts agree that while the likelihood of further significant easing in the short term is low, the possibility of restarting rate hikes in the medium term is gradually increasing. Market participants point out that the ECB is likely to maintain its current policy rate at its December monetary policy meeting on Thursday (December 18th). However, discussions on the medium-term interest rate path have quietly incorporated expectations of rate hikes into the main agenda. This signals that Eurozone monetary policy may be shifting from easing to a more neutral or even tighter stance.

Macroeconomic data supports policy confidence, but upside risks to growth and inflation are emerging.

Since the European Central Bank's (ECB) October policy meeting, a series of Eurozone macroeconomic data has provided strong support for policymakers, confirming that current monetary policy is generally in a relatively ideal state. These data not only show significant upside potential for economic growth but also suggest that inflationary pressures may rise further in the future. This dual upside risk has shaken market confidence in the ECB's continued accommodative stance and laid the foundation for future policy normalization or even tightening.

Executive Board member Schnabel sends hawkish signal: Raising interest rates rather than cutting them is more in line with the current situation.

In a recent interview with a news agency, European Central Bank Executive Board member Isabel Schnabel stated that the central bank currently prefers to consider raising interest rates rather than continuing to cut them. This statement is seen by the market as an important policy indicator, reflecting growing concerns within policymakers about the economic growth and inflation outlook. Schnabel's remarks quickly attracted widespread attention and further strengthened market expectations for a medium-term interest rate hike path.

Lagarde may avoid explicitly declaring the end of the interest rate cut cycle, and policy communication remains cautious.

While the market widely believes the interest rate cut cycle is nearing its end, Bas van Geffen, senior macro strategist at Rabobank, points out that European Central Bank President Christine Lagarde is unlikely to explicitly announce the formal end of the rate cut cycle at her press conference following the December meeting. Lagarde is more likely to continue using the previous statement that "policy is in good shape," while emphasizing that the central bank will closely monitor the dual risks of economic growth and inflation. This cautious communication strategy avoids market over-interpretation while leaving room for flexible policy adjustments in the future.

A gradual interest rate hike in early 2027 is the mainstream scenario, while interest rates may remain unchanged across the board in 2026.

Bas van Geffen further revealed that his team has included two rate hikes, one in March and one in June 2027, in their baseline forecast scenario. He believes that as the Eurozone economy gradually recovers its momentum, the ECB will need to address potential upward inflationary pressures through several gradual rate hikes. Meanwhile, given that recent economic data has slightly exceeded the central bank's expectations, maintaining the current interest rate at the December meeting is almost a certainty. Looking further ahead, the ECB is likely to keep policy rates unchanged throughout 2026 and may moderately revise its growth forecasts upward in its economic projections to reflect the positive signal of gradually diminishing uncertainty. However, he emphasized that even a slight improvement in forecasts is unlikely to support further easing, and the market's perception of the end of the rate-cutting cycle will be further solidified.

Schnabel's views have gained some acceptance, but internal disagreements remain regarding the path of inflation.

Marco Wagner, senior economist at Commerzbank, also noted that Schnabel's "comfort" regarding market expectations of interest rate hikes stems from his assessment of upside risks to growth and inflation. However, he also pointed out that economists within the European Central Bank may have differing views on the inflation outlook. Due to the postponement of the implementation of the EU Emissions Trading System 2 (ETS 2) from January 2027 to January 2028, central bank staff predict that inflation in 2026 and 2027 will be significantly lower than the 2% target (potentially only 1.7% in 2027). This lower inflation forecast may become a key argument against interest rate hikes in the short term.

Concerns about a medium-term interest rate hike persist, while structural factors are pushing up inflationary pressures.

Despite limited pressure for short-term rate hikes, Marco Wagner stated that his team, like Schnabel, remains vigilant about the risk of higher inflation in the medium term. Structural factors such as massive fiscal stimulus programs across the Eurozone and a significant increase in defense spending are continuously boosting aggregate demand and could translate into more persistent inflationary pressures over a longer period. Therefore, his team's base case scenario is that key interest rates will remain unchanged for the next two years, but the possibility of rate hikes in the medium term should not be ignored.

In summary, the European Central Bank's monetary policy has entered a new phase, and the market needs to closely monitor the balance of risks.

According to multiple experts, the European Central Bank's monetary policy is at a crucial turning point: while the rate-cutting cycle is nearing its end, policymakers' vigilance regarding upside risks to economic growth and inflation is subtly pushing the policy stance towards neutral or even tighter. Interest rates are likely to remain unchanged in the short term, while expectations of a medium-term rate hike are gradually becoming the mainstream market consensus. Investors need to closely monitor the upcoming December policy meeting and subsequent data releases to grasp this profound and complex shift in Eurozone monetary policy.

Analysts point out that if the December meeting confirms maintaining interest rates unchanged and hints at medium-term tightening, the euro is likely to continue to receive support in the short term, but volatility caused by external risks such as global trade uncertainty should be watched out for.

At 09:10 Beijing time, the euro was trading at 1.1743/44 against the US dollar.