European Central Bank: Further tightening path outlined – Nordea

Nordea’s Jan von Gerich and Tuuli Koivu note that the European Central Bank (ECB) raised rates by 25bp and signalled readiness to tighten further as inflation stays above target. They highlight that core inflation is projected above 2% through 2028, supporting expectations for multiple additional hikes and a 3% deposit rate by October, despite downside risks to growth from the war in the Middle East.

ECB projections back more rate hikes

"The ECB hiked rates by 25bp and stands ready to do more, as the inflation outlook warrants. The above-target core inflation forecast still in 2028 supports our call for another rate hike as early as the July meeting and a total of four hikes."

"Despite downward revisions to growth, the ECB staff has not lost faith in the euro-area economy, and sees growth only modestly lower this year and next compared to March, while the core inflation profile was revised higher across the forecast horizon, underlying the need for further hikes. A core inflation forecast of 2.2% still in 2028 was based on market expectations of around three rate hikes in total, suggesting rates may have to be raised more than three times."

"Inflation projections were revised up for both 2026 and 2027 by a notable margin. Core inflation, now projected at 2.5% this year and 2.5% in 2027 signals persistent above-target price pressures and supports our view that further rate hikes are likely in the coming meetings."

"We continue to think the next 25bp hike will take place at the July meeting, though uncertainty remains large. In total, we expect a total of three further 25bp rate increases, which would lead to a 3% deposit rate at the October meeting."

"The immediate market reaction was relatively limited, and current financial market pricing suggests clear uncertainty over whether the next hike would take place already in July, but incoming data and news from the Middle East can certainly lead to more notable swings in expectations also going forward. We continue to see upside potential for euro-area rates."

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