The European Central Bank (ECB) is widely expected to raise its deposit rate by 25 basis points at its monetary policy meeting on the 10th. With Eurozone August consumer price inflation hitting a three-year high and inflationary pressures resurfacing, market attention is focused on whether the ECB will fire the opening shot for renewed global tightening with the most hawkish stance among the Group of Seven (G7) nations.

In a Reuters survey released on the 3rd, all 65 economists polled projected this hike, and market pricing based on LSEG data reflects a 98.9% probability of an increase. The deposit rate would rise from the current 2.25% to 2.50%. The ECB raised rates in June for the first time in three years, then held steady in July while sending hawkish signals by leaving the door open to further hikes.

What the market is watching at this meeting is not so much the rate decision itself but whether additional hikes are coming this year. Bloomberg noted that with oil price volatility and surging natural gas prices rekindling inflation concerns, the ECB is showing the most hawkish posture among G7 central banks, and attention is focused on whether a December hike signal will emerge.

Eurozone August CPI rose 3.3% year-over-year. That is well above the 2% target and the previous month’s 2.9%, marking the highest level since September 2023. Energy prices in particular surged 14.3%, with the spike in oil and gas prices stemming from the Middle East conflict seen as the key driver of inflation.

Analysts at JPMorgan, Societe Generale, and BNP Paribas have already revised their forecasts to include one more ECB rate hike in December. The assessment is that the ECB will move preemptively on tightening to avoid repeating the mistake of responding too late to the 2022 cost-of-living shock.

U.S.: August Inflation Data Will Determine September FOMC Outcome

The U.S. Federal Reserve’s September Federal Open Market Committee (FOMC) rate decision will be announced at 2 p.m. Eastern Time on the 16th. The Fed’s path is not as certain as the ECB’s. Rate hike expectations gained momentum after Fed Chair Kevin Warsh emphasized his commitment to managing inflation at last month’s Jackson Hole meeting and left the door open to further increases, but the outlook has since retreated following dovish remarks from some officials, including Fed Governor Christopher Waller.

According to CME FedWatch, the federal funds futures market is pricing in a 59.4% probability of a September rate hike. That is down from the 64% seen immediately after Chair Warsh’s Jackson Hole remarks. The market is now focused on the August Producer Price Index (PPI) and CPI releases scheduled for the 10th and 11th. Governor Waller said in an earlier interview with Reuters that he would support holding rates steady at the September FOMC meeting if the August inflation data confirms a slowing trend.

U.S. August CPI is expected to rise 0.4% month-over-month, with core CPI up 0.2%. In that scenario, annual core inflation would ease to 2.4%, the lowest level since 2021. However, Canada’s retaliatory tariffs on U.S. goods took effect on the 8th, introducing North American trade tensions as a new variable.

BOJ: 94% September Hike Probability — Yen Weakness and Inflation Apply Pressure

The Bank of Japan’s (BOJ) rate hike is being treated as nearly a foregone conclusion. The BOJ is expected to raise its policy rate by 25 basis points from the current 1.00% to 1.25% at its monetary policy meeting on the 17th-18th. According to Nikkei’s tally, the market-implied probability of a September hike has surged from 67% on the 10th of last month to 94% as of the 1st of this month.

The backdrop forcing the BOJ’s hand is inflation and yen weakness. Japan’s price growth is running above target while the weak yen is pushing up import prices. The Middle East war has also driven international oil prices sharply higher, adding energy-driven inflationary pressure. With the risk that prolonged yen weakness could further inflate import costs and entrench price growth, the BOJ faces a growing need to stabilize inflation expectations through additional rate hikes.

U.S. Treasury Secretary Scott Bessent’s call for Japan to raise rates to curb yen weakness may also have influenced the BOJ’s decision. The BOJ’s rate decision is scheduled to be announced around noon on the 18th.

Global Central Banks: Diverging Paths

The ECB’s tightening signal is expected to influence other central banks’ policies. Denmark’s central bank is expected to raise borrowing costs by 25 basis points in lockstep with the ECB. Serbia’s central bank is likely to hold rates at 5.75%, while Turkey is seen keeping its policy rate frozen at 37% despite the economic slowdown, though some probability of a 100bp cut exists.

In Latin America, Brazil is expected to cut rates for a fifth consecutive time to 13.75% as August inflation fell below 4.3%. Peru, by contrast, faces pressure to raise rates from the current 4.25% as inflation exceeds target. Colombia also saw headline and core inflation tick up to 6.03% and 6.07%, respectively.

China’s August CPI is forecast to rise 0.9% year-over-year with PPI up 3.7%, sending positive signals for domestic demand.

With global central banks charting divergent courses, the ECB’s decision stands as the first instance of a major central bank opting for preemptive tightening in this inflation cycle, and it is likely to serve as a key reference point for other major economies’ policy paths. Should a December hike signal emerge, global financial markets could see a broad-based repricing of tightening expectations.