The European Central Bank (ECB) is “done with rate cuts” and its next move could be a rate increase, London-based lender HSBC has warned.
The bank said it expected euro zone inflation to slip below the ECB’s 2 per cent target for most of next year as the pass-through from a stronger euro and US tariffs add to disinflationary pressures.
“Despite sub-target inflation next year, our central case is that the ECB is done with rate cuts,” it said in a report on Europe’s economy.
However, it warned that rising wage costs fuelled by still strong (if cooling) labour markets; the prospect that tariffs may reconfigure supply chains and looser fiscal policy on the part of governments may result in a build-up of inflationary pressures in the medium term.
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“Building inflation pressures in 2027 could mean the next ECB move is up,” it said, forecasting euro zone inflation could climb above target by the end of 2027.
“In turn, we see the ECB raising rates in H2 2027, with 25bp (basis points) hikes in September and December,” it said.
[ ECB will not commit to a pre-determined path on rates, says MakhloufOpens in new window ]
Frankfurt policymakers left euro zone interest rates on hold for a second straight month in September as it weighed the outlook for inflation amid a slowdown in trade and ongoing political turmoil in France.
HSBC noted that the ECB had managed to bring down inflation from a peak of 10.6 per cent “with a minimum amount of economic pain – ie little rise in unemployment and no fall in output."
“This is a far cry from previous inflationary episodes, where recession and painful job losses were needed to restore price stability,” it said.
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“That makes recent attacks on independent central banks all the more alarming,” the bank said.
US president Donald Trump has repeatedly attacked US Federal Reserve chief Jerome Powell for not reducing US interest rates fast enough and has threatened to have him fired.
“While the ECB’s strict inflation mandate is set in an EU treaty, which should make it well protected relative to the US Fed, it could still face political pressures given fiscal challenges,” HSBC said.
