NextFin News - The European Central Bank is holding rates steady for now, but one of its own policymakers is telling markets that the next move may still be up rather than flat. Lithuanian Governing Council member Gediminas Simkus has argued in recent remarks that the ECB remains more likely to hike than simply hold, a view that sits uneasily beside the bank’s July 23 decision to keep the deposit facility rate at 2.25%. The tension is not about whether the ECB can pause. It already has. The real question is whether the pause is a resting point or only a brief stop on the way to one more tightening step.
That question matters because the ECB is trying to preserve optionality while markets are trying to pin down a terminal rate. In its July statement, the Governing Council kept the deposit facility rate at 2.25%, the main refinancing operations rate at 2.40% and the marginal lending facility at 2.65%. It said the bank would continue to base decisions on the inflation outlook, underlying inflation and the strength of monetary policy transmission, while remaining data-dependent and meeting-by-meeting. In other words, the ECB has not pre-committed to either a renewed hike or a longer hold.
Market pricing shows how unsettled that distinction remains. ECB Watch said on July 24 that markets assigned a 93.0% probability to a 25 basis point hike to 2.50% by the September 10 meeting, versus a 7.0% probability of staying at 2.25%. A separate prediction market put the probability of no change at the July meeting at 99.3%, with a 25 basis point increase priced below 1%. The apparent contradiction is only superficial. Traders are largely certain the ECB would not move in July, but they are still willing to pay for the possibility that the next decision could be tighter.
The ECB’s own survey data helps explain why the debate has not been settled. In the third-quarter Survey of Professional Forecasters, the modal expectation for the policy rate remained 2.25%, reported by 61% of respondents. At the same time, the survey said most respondents still expected a further increase. That split is important because it shows the market and forecasters do not yet agree on whether the cycle has already peaked. A rate path can look complete in one dataset and unfinished in another.
Simkus has repeatedly been one of the policymakers willing to keep tightening odds alive when consensus leans the other way. In June 2025 he said a July pause was “very likely,” but also said he remained open to every possibility by September and that “nothing has fundamentally changed since June.” Two years earlier, in June 2023, he said he would not be surprised by a rate hike in September. The common thread is not an obsession with one particular move. It is a tendency to see policy as contingent on incoming data rather than anchored to a single easing narrative.
The ECB’s Pause Is Still A Moving Target
The first judgment is that the current pause is cyclical, while the risk of a higher terminal rate is structural. The pause itself reflects a standard central-bank wait-and-see pattern after a long tightening run: inflation has cooled from prior peaks, the Governing Council wants to gauge lags, and policymakers are reluctant to over-commit. That is a cyclical dynamic, because it can reverse if the next data set softens. The structural risk is different. If services inflation, wages or energy shocks keep pushing the inflation process above what the ECB thought was its end state, the market may have to reprice a higher terminal rate and stop assuming that the policy cycle is finished.
The ECB’s July statement supports the cyclical reading of the pause while preserving the structural risk of further tightening. The bank said it would base interest-rate decisions on the inflation outlook, underlying inflation and the strength of monetary policy transmission, and that it was not pre-committing to a particular rate path. That wording matters. It does not just preserve flexibility; it tells markets that the Governing Council views the end point as data contingent.
Simkus’s comment sharpens the mechanism. A central bank can pause for three different reasons: because it thinks it is done, because it is waiting for confirmation, or because it is not yet sure whether its job is finished. The first case is the least market-sensitive; the third is the most volatile. Simkus’s language implies that the ECB is still in the third camp. That is why the market is not treating 2.25% as a final answer. It is treating it as an interim waypoint.
That creates a second-order effect that is more important than the first-order rate move itself. The obvious reaction to a higher policy odds curve is a firmer euro and a more stressed front end. But the deeper transmission is through expectations about growth and credit. If a hike becomes more likely while growth remains weak, the signal is not just “higher rates.” It is “the ECB may need to keep pressure on inflation even at the cost of weaker activity.” That can support the currency and pressure euro area risk assets at the same time.
The Governing Council will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance.
That sentence from the ECB is the clearest description of why this story is still alive. It means every new inflation print, wage update or energy shock can move the policy distribution. In that framework, Simkus’s hawkish tilt is not a prediction that a hike is certain. It is a warning that the balance of probabilities can still shift if the next data point refuses to cooperate.
The counterargument is straightforward. The ECB has already done enough, and a longer hold is more likely than another hike if inflation continues to ease. That case leans on the fact that the Governing Council already left rates unchanged in July and that the ECB’s own forecasters still center on 2.25%. It also leans on the usual lag argument: monetary policy takes time to work, and the full effect of past tightening may not yet be visible in credit demand, investment and consumption. On that reading, a hike from here would risk over-tightening just as the cycle is cooling.
But the hawkish case still has the advantage of asymmetry. If the market has become too confident that the ECB’s cycle is over, then even a modest shift in the odds toward a September hike can move pricing more than the actual July hold. The move the market has to defend is no longer this month’s decision. It is the idea that the policy floor may not be the ceiling.
The signal that would falsify Simkus’s view is concrete: if the next ECB projections show inflation and underlying inflation staying close to 2% without a fresh energy shock, and if market pricing for a September hike drops decisively below 50%, then the case for additional tightening would weaken sharply. In that outcome, the pause would look durable rather than provisional.
What The Market Is Really Pricing
In the short term, the market is pricing a distribution, not a conclusion. A 99.3% probability of no change in July and a 93.0% probability of a September hike cannot both be read as simple conviction in one policy path. Together they say traders view the immediate meeting as settled but the next one as live. That is classic front-end uncertainty: the closer the ECB gets to its next forecast round, the more the policy path depends on fresh numbers.
That matters for bonds first. The most sensitive part of the curve is the near end, where the price of one more hike can alter expectations for funding costs and the average path of rates over the next few quarters. Longer-dated yields usually react less to a single meeting and more to the broader growth and inflation regime. So a hawkish repricing here is not just a story about yields moving higher. It is a story about the curve becoming more inconsistent with the idea that policy is already done.
The euro is the next transmission channel. If the ECB is still more likely to hike than hold, the currency can benefit from a relative-rate effect even if the wider economic picture remains soft. That is the second-order trade-off. A firmer euro can ease imported inflation, but it can also squeeze exporters and tighten financial conditions. In other words, a hawkish repricing can help the ECB on prices while making life harder for growth.
The exposed side is broader than sovereign bonds. Banks, corporate borrowers and rate-sensitive sectors all care whether 2.25% is a plateau or a staging point. If policymakers keep the possibility of more tightening alive, funding assumptions remain less stable, and the market has to keep a premium for policy uncertainty. That premium is small when inflation is moving cleanly lower. It becomes larger when the next move could still be up.
Medium term, the key issue is whether the current pricing proves temporary or becomes the start of a higher terminal-rate debate. The ECB’s own survey suggests the median view still sits at 2.25%, but the same survey also says most respondents expect another increase. That is not a fully settled environment. It is a market and policymaker ecosystem trying to locate the true end point after an extended rate cycle.
Long term, this episode argues against reading the ECB’s pause as a structural end to tightening pressure. If the next few inflation and wage prints continue to run hot, the council may have to keep the option of another hike alive longer than investors prefer. If those prints soften, the market can revert to a hold-and-cut narrative. Either way, the lesson is that a pause can be cyclical while the debate around the terminal rate is still unresolved.
Base case: the ECB holds in the near term, keeps stressing data dependence, and leaves markets to debate whether September is still live. Upside case for hawks: inflation or energy shocks reassert themselves and push the Governing Council toward one more increase. Downside case: inflation cools cleanly enough that the hike probability collapses and the hold becomes the durable endpoint.
What to watch next is not just the next meeting date but the next inflation sequence, wage data and the ECB’s updated projections. If those numbers line up with a return toward target, Simkus’s warning will fade. If they do not, the market will have to take the idea of a higher-for-longer ECB more seriously.
The ECB has not finished the story; it has only paused mid-chapter. And the more markets price that pause as temporary, the less temporary it may turn out to be.
Explore more exclusive insights at nextfin.ai.
