ECB may lift rates 50 bps by mid-2027 as energy costs fuel inflation

what happened

The European Central Bank could raise its cumulative policy rate by 50 basis points by the first half of 2027, according to a research report from ICICI Bank Global Markets. The report sees one 25 bp hike before the end of 2026 and another in the first half of 2027, assuming energy and commodity prices remain high.

Eurozone headline inflation on the HICP measure rose to 3.8% year on year in September from 3.2% in August. Energy inflation jumped to 18.9% from 14.3%, and energy prices rose 4% month on month, their fastest gain in six months. The report blamed geopolitical disruption in West Asia.

Core inflation edged up to 2.5% from 2.4%, and services inflation rose to 3.2% from 3%. Core goods inflation held at 1.2%, which the report said suggests that higher energy costs have so far passed into core goods prices only modestly.

why it matters

The key signal for markets is that the ECB may keep tightening even though the price rise is largely energy-driven. Expectations of higher rates typically support the euro and weigh on long-duration bonds and equities. Rising services inflation strengthens the case for further hikes, so the path of oil and gas prices will shape rate expectations.

market impact

Euro and euro-area bonds: higher expected ECB rates support the euro and pressure government bonds

tags

instruments