Euro area: ECB path assessed amid stagflation risks – Standard Chartered

Excluding Ireland, euro area GDP growth has slowed steadily since Q4-2025 as inflation continues to climb, according to Standard Chartered’s Christopher Graham. Although conditions do not yet meet the definition of stagflation, he sees the risks increasing. Graham identifies higher energy prices and the delayed effects of ECB tightening as the main headwinds. He forecasts a further 25bps rate increase in December, with inflation beginning to decline early next year.

Slowing growth and rising inflation deepen ECB policy dilemma

"Eurostat data released this morning showed euro area headline inflation rising to 4.0% y/y in October, above our expectation of 3.8%. This signals upside risks to the European Central Bank’s (ECB’s) September projection of 3.6% average inflation in Q4."

"Stripping Ireland out, euro area GDP growth was a more modest 0.2%, and, crucially, growth momentum has been falling steadily since Q4-2025."

"The combination of weakening growth momentum (using euro area ex Ireland data) and still-rising inflation creates a growing policy dilemma for the ECB. Inflation dynamics (and the risk of second-round effects) will likely dominate for now, underpinning our expectation of another 25bps hike at the December meeting."

"Stagflation is not our base case; we expect growth to remain positive and inflation to begin falling early next year."

"But the direction of travel is that way, and the forces that could produce stagflation in coming quarters are apparent: higher energy prices that are squeezing real income and weighing on corporate profit margins; ECB monetary tightening operating with lagged effects on household and corporate borrowing costs; and tighter financial conditions weighing on broader activity."

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