Nomura analysts predict that Euro area inflation will remain near the European Central Bank’s 2.0% target until 2027. Gross Domestic Product (GDP) growth is expected to return to pre-pandemic levels by mid-2026.<\/p>\n
There is potential for inflation to exceed the ECB’s target in 2028, which may lead to rate hikes. The labour market is noted as a factor contributing to inflationary pressures, with expectations of rate increases in the future.<\/p>\n
The ECB is expected to maintain current rates through 2027. However, due to a decreasing unemployment rate and projected economic growth surpassing potential, inflation may rise above the 2.0% target by 2028.<\/p>\n
The ECB may raise rates by at least 50 basis points in 2028 to control inflation. Earlier and additional rate hikes could occur if inflation pressures increase more than anticipated.<\/p>\n
The ECB’s primary focus is on the forecast for 2028 rather than short-term adjustments. A stronger euro could reduce inflationary pressures, but the precise level that would prompt an ECB response remains uncertain.<\/p>\n
We see the European Central Bank holding rates steady for now, but risks are clearly pointing to future hikes. With Euro area inflation hovering just over the 2.0% target, as seen in the latest January data which came in at 2.1%, the market might be underestimating future price pressures. This sets up opportunities in interest rate derivatives that bet on higher rates further down the line.<\/p>\n
A key reason for this view is the tight labor market, with the unemployment rate hitting a record low of 6.3% at the end of 2025. This kind of pressure on wages is exactly what we saw cause inflation to accelerate back in the 2022-2023 period. We believe this will eventually force the ECB\u2019s hand sooner than the market is currently pricing in.<\/p>\n
Therefore, in the coming weeks, traders should consider positioning for a repricing of the late 2027 and 2028 rate path. This could involve looking at forward-starting interest rate swaps or options that pay off if rate hikes are brought forward. The current pricing for that period seems to underappreciate the risk that inflation will overshoot as the economy continues its steady recovery.<\/p>\n
One factor to watch is the strength of the euro, which could dampen some of this inflation. A significantly stronger currency might delay the ECB’s need to act on rates. This makes options on the euro a potential tool to hedge against any delays in the expected hiking cycle.<\/p>\n
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