ECB Watch: Between a shock and a hard place

The ECB is likely to resume tightening in December 2026 despite the growth risks from higher energy prices and tighter financing conditions.

• Energy prices have continued to rise, creating upside risks for inflation and downside risks for growth, while underlying inflation has remained broadly stable and wages have not shown a material response.
• Nordea expects the larger and longer-lasting energy shock to raise inflation and reduce growth through indirect and second-round effects, although the ECB has not yet seen an increase in second-round-effect risks since September.
• Financing conditions have tightened since the previous Governing Council meeting, including higher long-term borrowing costs, which should weigh on both growth and inflation.
• The ECB held rates unanimously, but Lagarde said policymakers had debated a hike and that the direction of travel was clear, supporting Nordea’s forecast of a hike in December followed by a 25bp increase in March 2027.
• Markets initially interpreted the decision as dovish, but short-term rates rebounded and EUR/USD more than reversed its early decline after Lagarde’s comments.

Takeaway: Nordea retains a two-hike baseline but acknowledges that risks have shifted to the downside; ECB intervention in bond markets is unlikely without appropriate fiscal measures from high-debt countries, although the central bank retains tools against unwarranted tightening.