ECB: Inflation risks shifting higher into 2028 – Nomura

Nomura’s Global Markets Research team expects Euro area HICP inflation to hover around the ECB’s 2.0% target through 2027, with risks turning clearly to the upside in 2027–2028. They project the ECB will keep rates unchanged until 2028, when at least two 25bp hikes may be needed to return inflation to target.

Rates on hold before 2028 tightening

"We forecast euro area inflation to average 1.9% this year and 2.0% next year. However, while inflation risks are skewed to the downside this year, they are skewed squarely to the upside in 2027 and, in particular, in 2028. Upside risks are owing to a tight labour market, where we forecast the unemployment rate to fall further below its equilibrium rate, adding to wage growth and inflationary pressures."

"Hence, while we believe the ECB will remain on hold for the foreseeable future, we believe the next move will be a hike rather than a cut. In addition, we believe the ECB will need to raise rates at least 50bp in 2028 (two 25bp hikes) to bring inflation back to target. The risk, however, is skewed to earlier hikes and more hikes should upward inflationary pressures prove stronger than we expect."

"In particular, we forecast euro area GDP growth markedly above the forecasts of the ECB and consensus in 2027, which are likely to add meaningfully to domestic inflationary pressures towards the end of 2027 and, in particular, in 2028. Hence, we believe the ECB’s next move will be to raise rates rather than to cut rates, and we expect the ECB will need to raise rates twice by 25bp in 2028 to bring inflation back to target. The ECB estimates that a 100bp rise in rates lowers HICP inflation by around 0.3pp."

"Euro area HICP inflation declined by 0.3pp to 1.7% y-o-y in January 2026, and we expect it to print modestly below the ECB’s 2.0% target in H1 2026 owing to energy base effects, before rising to around target through the end of 2027. The consensus and the ECB also expect HICP inflation to undershoot 2.0% for much of 2026, and financial markets are pricing in sub-target inflation for the foreseeable future."

"The ECB is now squarely focused on its end-of-horizon forecast, which is currently 2028, rather than near-term deviations. Indeed, in their June 2025 forecasts, ECB staff had forecast HICP inflation to dip as low as 1.4% in Q1 2026, yet the ECB Governing Council did not see the need to continue cutting beyond June 2025, as HICP inflation was forecast to be below target due to energy base effects and to return to target after these base effects had faded."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)