The ECB does have some genuine reasons for concern. Euro-area labour markets are showing signs of elevated tightness, as illustrated by the record-low unemployment rate, even if wage growth has yet to pick up considerably. An increasing share of prices is rising rapidly, and it is not a given that weaker economic developments would quickly bring inflation down to the ECB’s 2% target. As the ECB has emphasised, it needs to send a clear message that it will not allow inflation to stay above 2%. And it will certainly take more than one rate hike and a deposit rate at zero to send such a message. We expect 50bp rate hikes at the upcoming two monetary policy meetings and the depo rate to reach 1.5% next year.
The EUR curve could flatten further towards the end of the year, as the ECB hikes lift the short end, while growth worries limit the upside for the long end. If the economy rebounds after the winter and the ECB pauses its rate hikes in the first half of next year, the curve could steepen again. As the US economy is set to outperform the Euro-area economy, we also see further downside for the EUR/USD towards the end of the year.
- Nordea Research
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