ECB Watch: Still waiting for round two

The ECB is keeping all policy options open because persistent energy shocks and a resilient economy could eventually broaden inflation pressures, despite growing downside risks to growth.

• The September account showed that all Governing Council members viewed inflation risks as skewed to the upside relative to staff projections, with the Middle East conflict and Russia’s war against Ukraine identified as key risks.
• Policymakers judged that the transmission of energy-price increases to non-energy components had remained limited, with no significant broadening of inflation across consumption items so far.
• They nevertheless warned that inflation could broaden through indirect and second-round effects if energy prices stayed high, keeping headline inflation above target into the first half of 2027.
• The ECB refused to pre-commit to a rate path, stressing data dependence and full discretion because conditions could change rapidly; it also noted that higher long-term rates could materially weaken growth and inflation.
• Wider French bond spreads have added a downside risk to growth, while current market pricing has moved back close to Nordea’s baseline after the repricing.
• Nordea expects two further 25bp rate hikes, in December and March, although the ECB’s 2.50% deposit rate is already within staff estimates of the neutral-rate range.

Takeaway: Nordea sees further ECB tightening as the baseline, but investors should monitor whether energy prices generate broader inflation and whether bond-market stress and tighter financing conditions materially weaken demand.