Nomura’s Global Markets Research team argues that persistent wage pressures in the Euro area will keep inflation risks elevated in 2027–2028. They note that markets already price modest ECB tightening by 2028 and expect the central bank’s next move to be rate hikes, not cuts, likely two 25bp increases in 2028.

Markets lean toward renewed ECB tightening

"Financial markets are pricing 13bp of hikes by December 2027 and 37bp of hikes by December 2028. In our view, the medium-term upside inflationary pressures, stemming from an increasingly tight labour market, justify markets pricing the next move as more likely to be a rate hike rather than a rate cut."

"While inflation risks in 2026 are skewed to the downside, the inflation risks in 2027, and in particular 2028, which the ECB is most concerned about, are squarely skewed to the upside."

"As we have previously highlighted, the upward wage pressures from a tight labour market that we expect to tighten further, and the upward inflationary pressures from economic growth being above potential in 2026 and 2027, are likely to add meaningfully to domestic inflationary pressures towards the end of 2027 and, in particular, in 2028."

"So, we believe the ECB’s next move will be to raise rates rather than to cut rates, in line with markets, and we expect the ECB will need to raise rates twice by 25bp in 2028 to bring inflation back to target (we have tentatively pencilled in March and September 2028 for hikes). That said, the risk is skewed to earlier hikes and more hikes should upward inflationary pressures prove stronger than we expect."

"In our view, however, it appears we are moving into a pre-financial crisis world, where the labour market is tight, the unemployment rate is below the equilibrium unemployment rate, and GDP growth is above potential; in particular, in the services sector, it appears only Germany has spare services output capacity, with the euro area, France and Italy running modestly hot."

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