Nordea analysts expect the European Central Bank (ECB) to focus more on inflation than growth as the Middle East conflict continues and price pressures increase. They forecast four 25 basis point rate rises starting in June.
In this forecast, the ECB would raise rates by 25bp at the June meeting and then deliver three more 25bp rises at consecutive meetings. This would take the deposit rate to 3% by October.
Inflation Risks Drive Policy Focus
They expect the deposit rate to stay at 3% through to the end of 2027. They also see a risk of an earlier start or larger moves than in their baseline forecast.
The first rise could come as early as April, or the June rise could be more than 25bp, depending on the price outlook. They link the timing of the first move mainly to the conflict and energy prices, and later decisions to wider inflation pressures and how the economy performs.
With new geopolitical risks pushing energy prices up, we expect the European Central Bank to again prioritize inflation over growth concerns. The recent jump in Brent crude to over $105 a barrel is feeding into broader price pressures, challenging the ECB’s current policy stance. This makes future interest rate hikes a distinct possibility this year, even after the long pause.
Eurostat’s latest flash estimate showed headline inflation for March ticking up to 3.1%, uncomfortably above the 2% target and a reversal of the disinflationary trend seen through 2025. We now forecast a 25 basis point hike at the June meeting, which would be the first change in policy in over a year. This initial step would signal a firm commitment to tackling this new inflationary wave.
Market Pricing And Rate Path Implications
For derivative traders, this means pricing in a more aggressive rate path, with short-term interest rate swaps (SIRS) likely to see upward pressure. We project a series of four 25bp hikes this year, bringing the deposit facility rate to 4.5% by October. Options markets should prepare for higher volatility, especially around ECB meeting dates in June, July, and September.
We then expect rates to remain at that level for the remainder of the forecast horizon until the end of 2027, as the bank ensures inflation is firmly anchored. Looking back at the rapid hiking cycle of 2022 and 2023, we know the central bank can act decisively when inflation expectations are at risk. While a 25bp move in June is our base case, an unexpectedly high inflation print for April could force the ECB’s hand for a larger 50bp hike.
