ECB: Inflation risks skewed to the upside – Nomura

Nomura analysts project that Euro area inflation will hover around the ECB’s 2.0% target until the end of 2027, with GDP growth expected to reach pre-pandemic levels by mid-2026. They foresee potential inflation overshooting in 2028, necessitating rate hikes. The report emphasizes a tight labor market contributing to inflationary pressures and anticipates the ECB will raise rates in the future.

ECB rate hikes anticipated in 2028

"We expect euro area HICP inflation to hover around the ECB’s 2.0% target until the end of 2027, and we forecast GDP growth to reach its pre-pandemic trend rate by mid-2026. Hence, we expect the ECB to leave rates unchanged through 2027."

"However, owing to a combination of the unemployment rate likely falling further below its equilibrium rate and our forecast of economic growth rising to a rate meaningfully above potential, we see a real risk that inflation will overshoot the ECB’s target in 2028."

"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."

"The ECB is now squarely focused on its end-of-horizon forecast, which is currently 2028, rather than near-term deviations."

"A stronger euro could add disinflationary pressures, though at what level this may trigger a response from the ECB on account of the effect on inflation is debatable."

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