The Euro-area flash inflation estimate for November remained close to the ECB’s target at 2% y/y, supporting an ECB that is on hold unless new shocks appear. The first quarter of 2026 is likely to see too low inflation followed by gradually increasing inflation over the course of 2026 and 2027 as fiscal easing picks up, leading to ECB rate hikes in 2027 in our forecast, Nordea's market reporters Anders Svendsen and Tuuli Koivu note.

Labour market tightness counters call for near-term eate cuts

"Services price inflation increased to 3.5% y/y and remains high and sticky, though the monthly rate of change eased slightly. The ECB’s wage tracker points to lower growth in negotiated wages during next year, which should add downward pressure on services price inflation in 2026."

"The labour market remains tight, though, with the unemployment rate still close to all-time lows. The unemployment rate increased to 6.4% in November. Recently, household inflation expectations have crept higher too, adding to the ammunition of those Governing Council members who oppose additional rate cuts without a significant shock to the economy."

"ECB staff projections as well as market pricing have inflation below 2% in the years ahead. We are the odd ones out with an upwards trajectory stemming from easier fiscal policy and stronger growth ahead (GDP up by 1.5% and 2.0% in 2026-2027). Markets expect no changes to ECB rates during 2026, which is in line with our forecast. We see risks skewed towards rate cuts in the near term and risks skewed towards rate hikes later on as fiscal easing picks up."