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NextFin News - The European Central Bank is likely to raise borrowing costs next month for the third time since the Iran war began, Governing Council member Ante Zigman said on Thursday, putting a firm date on a tightening path that markets have only cautiously priced. "Inflation has continued to rise in October," Zigman said in Opatija, Croatia. "We can say that there's a rather big chance that interest rates rise in December."
The remarks, delivered days after euro-area inflation accelerated to 4.0% in October - its highest level in more than three years - are among the clearest hawkish signals from the Governing Council since policymakers held rates steady at 2.50% on October 29. The question is no longer whether the ECB is worried about prices, but whether one policymaker's candor is enough to pull a consensus-driven institution toward a December move that would lift the deposit rate to 2.75%.
The Signal and the Numbers Behind It
Zigman, the governor of the Croatian National Bank who took office in June 2026, has been progressively sharpening his tone. On October 8, speaking in Porec, he framed the October 29 meeting as one that would involve "very intensive" discussion of the policy roadmap. After that meeting - at which the ECB kept its three key rates unchanged at 2.50%, 2.65% and 2.90% - he went further, telling reporters that a decision on a possible increase could come "as early as the next meeting" while describing a gradual tightening of monetary policy as appropriate. Thursday's "rather big chance" phrasing closes the loop: the next meeting is December 17.
The data he is reacting to is unambiguous. Eurostat's flash estimate put euro-area annual inflation at 4.0% in October, up from 3.8% in September and exactly in line with the 4% economists had expected. Energy was the dominant driver at 20.8% year-on-year, up from 18.9% in September; at the euro area's roughly 9% energy weight, that accounts for close to half of the 4.0 percentage-point annual rate. Services inflation - the component the ECB watches most closely for second-round effects - ticked up to 3.3% from 3.2%. Only core inflation, excluding energy and food, held steady at 2.3%, with a monthly rate of 0.3%.
That mix is the crux of the December debate. An energy shock that lifts headline inflation to 4% while core holds at 2.3% is, in textbook central-bank terms, a case for looking through the noise. But the textbook assumes the noise stays in energy. When energy feeds into services, rents, and wage demands, "looking through" becomes a euphemism for falling behind the curve - the sin every ECB policymaker since the 1970s has been trained to avoid.
Market pricing, as of mid-October, had not caught up to this risk. Rate-probability data showed just a 5.9% chance of no change at the December 17 meeting and a 93.1% probability of a 25-basis-point move to 2.75%, with only 0.9% pricing a half-point increase. Those odds were set before the October 31 inflation flash and before Zigman's latest comments; they almost certainly understate the current probability of a hike. The market has priced one move in December but remains skeptical that tightening continues into 2027, where pricing splits between 62.6% at 2.75% and 33.2% at 3.00% for the February 4, 2027 meeting.
Why This Hike Cycle Is Different From the Last One
The ECB's current tightening cycle began on June 11, 2026, when the Governing Council raised its three key rates by 25 basis points - the first increase since September 2023. The deposit facility moved to 2.25%, the main refinancing rate to 2.40%, and the marginal lending facility to 2.65%. The trigger was the war in the Middle East, which the ECB said outright was "generating inflation pressures." A second 25-basis-point hike followed on September 10, taking the deposit rate to 2.50%.
The pattern is deliberate: the ECB is hiking in roughly quarterly increments, one meeting on, one meeting off. June, September, and now a December move would fit a rhythm that gives policymakers time to read incoming data without surrendering the initiative. It is a slower cadence than the 2022-2023 campaign, but that is precisely the point. This is not a demand-overheating cycle that requires front-loaded aggression. It is a supply-shock cycle where moving too fast risks breaking an economy already absorbing an energy-price spike.
The September macroeconomic projections laid out the trade-off. The ECB's staff expects headline inflation to average 3.0% in 2026, 2.5% in 2027, and 2.1% in 2028 - well above the 2% target for the entirety of the forecast horizon. Core inflation is projected at 2.5% in 2026, 2.6% in 2027, and 2.3% in 2028. Growth, by contrast, is seen at just 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. Policymakers are being asked to tighten into an economy growing at less than 1% this year, with inflation still twice target two years out.
"Above all, interest rate decisions will be made on the basis of the assessment of expected inflation developments and the risk environment," Zigman said after the October 29 meeting, adding that the continued rise in energy prices created risks of a further increase in inflation and weakened the outlook for euro-area growth, "although underlying inflation remained stable and subsequent inflationary pressures were still subdued."
That sentence contains the entire tension of the December decision. Underlying inflation is subdued. The risk environment is deteriorating. A data-dependent council can justify either a hike or a hold with those same facts - which is why one member's explicit probability statement matters more than it normally would.
The Second-Order Problem: Credibility Is the Real Transmission Channel
The first-order effect of a December hike is mechanical: borrowing costs rise, the euro strengthens, bond yields climb, and rate-sensitive sectors - housing, utilities, highly leveraged corporates - feel the squeeze. That part is already priced. The second-order effect is what Zigman's comment actually changes, and it runs through the ECB's credibility rather than through the policy rate itself.
Central banks move markets not only through the rate they set but through the expectations they anchor. When inflation is running at 4% and a council member publicly assigns a "rather big chance" to a hike, he is doing more than forecasting - he is testing whether the institution can speak clearly without fracturing. If the December meeting delivers the 25-basis-point move, the message is that the ECB reads energy-to-services pass-through as a genuine second-round risk and is willing to act preemptively. That would compress the term premium on euro-area bonds and give the euro a durable bid, because markets would price a higher-for-longer path rather than a one-off adjustment.
If the December meeting disappoints, the cost is asymmetric. A hold after such explicit signaling would be read as the council talking itself into a corner and then backing down - the worst possible outcome for an institution whose entire operating model rests on forward guidance. The euro would likely sell off, bond yields could rise on a credibility premium rather than fall on dovish news, and the market would start pricing the possibility that the ECB has lost control of the narrative. That is why the probability of a hike and the probability of a coherent explanation are now the same variable.
This is also where the cross-asset transmission bites hardest. German 10-year bund yields traded around 3.29% in early November, down from the September peak near 3.47% but still well above the roughly 3.07% seen in July. The gap between where yields are and where inflation is tells you the market is still betting this is a cyclical energy spike that will mean-revert. Zigman is effectively arguing that the market is wrong - that the spike is becoming embedded, and that yields need to reprice accordingly. If he is right, the adjustment is not 25 basis points at the front end; it is a broader steepening of the euro-area curve as term premium returns.
The Cyclical Call: Why This Is a Mean-Reverting Shock, Not a Regime Shift
Despite the hawkish tone, the evidence points to a cyclical inflation shock rather than a structural regime change - and that distinction should temper how far the ECB can or should go. Three pieces of evidence support the cyclical read.
First, the composition of the October print is dominated by energy at 20.8%, a component with a documented history of sharp reversals. In October 2022, the energy component rose more than 40% year-on-year, directly contributing about 4 percentage points to a record 10.6% headline rate; by December 2022 energy inflation had already eased to an estimated 25.7% from 34.9% in November. The mechanism is supply-driven and self-correcting: as the Middle East risk premium normalizes or as storage and LNG capacity absorbs the shock, the energy contribution unwinds without any policy action at all.
Second, core inflation at 2.3% - and the ECB's own projection of core at 2.5% for 2026 - shows no sign of a wage-price spiral taking hold. Services inflation at 3.3% is elevated but has not accelerated sharply. In a structural regime shift, you would see broad-based momentum across wages, rents, and goods. Instead the data shows a concentrated energy impulse with contained pass-through.
Third, the macroeconomic backdrop argues against a prolonged tightening campaign. Growth of 0.9% in 2026 with unemployment risks building means the ECB does not have the room to hike repeatedly without triggering a recession. The September projections revised growth down and inflation up - a stagflationary mix that historically forces central banks to stop tightening once the labor market cracks, regardless of the inflation print.
The structural counter-argument exists but is weaker. A permanent regime shift would require evidence that the energy shock has permanently altered the euro area's terms of trade, that deglobalization is structurally raising import costs, or that the ECB's 2% target is being reinterpreted upward. None of those conditions is met. The target remains 2%. Longer-term inflation expectations, by the ECB's own October 29 statement, "stand at around 2 per cent." A central bank whose longer-term expectations are anchored at target is not facing a structural break - it is managing a cyclical disturbance.
The correct call, therefore, is a cyclical shock with a structural tail risk. The base case is one or two more hikes - December, and possibly February - followed by an extended hold as energy mean-reverts and core drifts back toward target through 2027. The structural tail risk is that energy stays elevated through the European winter, that services inflation re-accelerates, and that the ECB is forced into a third or fourth hike that tips the bloc into recession. The difference between the two scenarios is not monetary policy; it is the path of oil and gas prices over the next six months.
The Adversarial Case: Why December Could Still Be a Hold
The strongest argument against a December hike is not that inflation is tame - it is that a hike would be acting on the wrong variable. The ECB's mandate is medium-term price stability, and medium-term inflation expectations are anchored at 2%. If energy is genuinely transitory, then hiking in December is tightening policy against a shock that will have reversed by the time the policy works through the transmission mechanism - roughly 12 to 18 months. In that scenario, the ECB would be adding restraint just as the economy is already slowing on its own, needlessly deepening the growth slowdown and pushing inflation below target in 2027.
This caution has institutional backing. The International Monetary Fund's June 2026 assessment of euro-area policies, written before the full force of the October energy spike, built a baseline that assumed a cumulative 50-basis-point policy rate increase over 2026 relative to the pre-war level and judged the June hike "appropriate" - but also warned that risks were skewed toward weaker growth and higher inflation, with headline and core inflation forecast to stay above 2% into 2028. The counter-thesis holds that the October 29 hold was the correct decision precisely because it bought time: the ECB can wait for the November and December inflation prints, confirm whether services inflation is actually rolling over, and then act in February with better information. Waiting costs nothing if core is stable; a premature hike costs growth that cannot be recovered.
The answer to this counter-thesis is that the ECB has already signaled too much to reverse. Once a Governing Council member assigns a "rather big chance" to a December move, and once the October 29 meeting was read as a pause-before-resume rather than a pause-before-stop, the institution's credibility is now tied to the December decision. A hold would not be read as prudent patience; it would be read as paralysis. That is an uncomfortable position for a data-dependent council, but it is the position Zigman's candor has created.
The falsifying signal is specific and observable: if euro-area core inflation (HICP excluding energy and food) prints at or below 0.2% month-on-month for two consecutive months in November and December, and if services inflation falls back toward 3.0% or below, the case for a December hike collapses. At that point the energy spike would be demonstrably contained, second-round effects would be absent, and a December hold would be the data-consistent decision. Conversely, if core prints at 0.4% or higher month-on-month alongside another energy leg higher, the December hike becomes not just likely but necessary - and the market's 93% pricing would look conservative.
What to Watch: Scenarios Across Time Horizons
Short term (into December 17): The euro and front-end bunds will trade on every inflation print and every Governing Council speech. A core inflation print above 0.3% month-on-month in November would push December hike odds toward certainty and lift EUR/USD from its late-October trough near 1.113. A soft print would reopen the debate. The key asymmetry: hawkish surprises move markets more than dovish ones, because the ECB has more to prove on inflation than on growth right now.
Medium term (first half of 2027): The base case is a December hike to 2.75%, a February hold to assess the data, and then an extended plateau through mid-2027 as energy mean-reverts. In this scenario, the euro finds support but does not stage a sustained breakout, and bund yields stabilize in the 3.0%-3.5% range. The upside case is a second first-quarter hike to 3.00% if services inflation re-accelerates - a scenario that would send bunds materially higher and compress European equity valuations. The downside case is a December hold followed by a dovish pivot if energy collapses and growth deteriorates - a scenario that would weaken the euro and steepen the curve on recession fears.
Long term (2027 and beyond): The structural question is whether the euro area has entered a higher-inflation equilibrium. The evidence says no - expectations are anchored, the target is unchanged, and the shock is energy-driven. But the risk is that repeated supply shocks - the Middle East conflict, trade fragmentation, the energy transition - keep delivering cyclical impulses faster than any single one can mean-revert. In that world, the ECB spends the rest of the decade reacting to the latest shock rather than steering toward a steady state. That is not a regime shift in inflation; it is a regime shift in volatility. And it is a harder problem to solve with interest rates alone.
For investors, the practical implication is asymmetry, not direction. The beneficiaries of a December hike are the euro itself and the financial sector, which earns more on the spread between lending and deposit rates. The exposed are duration assets - long-dated bonds and high-multiple growth stocks - which suffer twice, from higher discount rates and from the credibility-driven term premium. The most vulnerable are the highly leveraged euro-area corporates that refinanced at near-zero rates and now face a structurally higher cost of capital.
The bottom line: Zigman's "rather big chance" is not just a forecast - it is a test of whether the ECB can follow through on its own signaling. A December hike would confirm that the institution still controls the narrative. A hold would suggest it is reacting to data it cannot quite read. Either way, the market is about to find out whether the euro area's inflation problem is a spike that will pass or a signal that something has changed.
Data as of November 5, 2026. Policy rates and projections from the European Central Bank; inflation data from Eurostat; rate probabilities from market-implied pricing current as of mid-October 2026; bond yields from OECD and interbank data.
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