European Central Bank: Inflation keeps three rate hikes in play - Nordea

Nordea analysts Ole Håkon Eek-Nielsen and Jan von Gerich anticipate the European Central Bank (ECB) will implement three additional 25 basis point rate hikes, raising the deposit rate to 3%. They attribute this to growing inflation pressures stemming from earlier energy price surges, disrupted supply chains, robust Euro-area growth, and low unemployment.

However, they acknowledge significant uncertainties surrounding the pace of rate increases, including Middle East developments and energy market disruptions. Despite this, the ECB's July meeting indicated further hikes were still on the table.

Eek-Nielsen and von Gerich maintain their expectation of three additional 25bp rate hikes, now scheduled for September, December, and March 2027, up from consecutive to quarterly increments. Their revised forecast assumes these hikes will occur, with the updated baseline. They project that a swift and lasting resolution to the Middle East conflict could temper the ECB's need for additional rate hikes, while a more significant escalation and prolonged energy market disruptions could prompt faster and potentially more frequent rate increases.

Even with a more measured approach to rate hikes, they believe longer-dated bond yields will likely rise, driven by abundant bond supply, the ECB's bond portfolio reductions, and heightened inflation risk expectations. The insights team, consisting of expert journalists and analysts, highlights that GBP/USD is gaining momentum, climbing to its highest level in three months near 1.3560.

The movement follows three consecutive declines and follows mounting selling pressure that has pressured the US Dollar. EUR/USD is also on the move, reaching the upper 1.1500s for the first time since mid-June, buoyed by a strong US dollar retracement amid talk of intervention by the Bank of Japan and despite ongoing Middle East uncertainty.

Gold rebounded towards the $4,400 mark as weakening US currency weighed on the greenback, while traders monitored expectations of a potential Fed rate hike and developments in the Middle East. July's actual inflation data met expectations, with a 0.1% month-to-month increase in headline CPI and a 0.2% rise when excluding food and energy costs.

Annual headline inflation remains elevated at 3.4%, reflecting stagnating wage earners' spending power and core inflation exceeding the ECB's 2% target.