ECB Faces Prolonged Hike Cycle as Euro Area Inflation Peaks

Societe Generale economists predict that Euro area inflation will stay above target beyond 2027. According to their projections, headline inflation is expected to peak near 3.7-3.8% and core inflation around 2.7-2.8%. The team sees the ECB hiking rates this week and again in December due to resilient activity and energy-related pressures.

The August flash euro area inflation was the most important release, rising 0.4pp to 3.3% yoy, its strongest reading since late 2023. This led Societe Generale economists to expect headline inflation to peak at around 3.7-3.8% yoy in early 2027.

Against the background of stronger upward pressures on inflation, now also stemming from resilient economic activity, strong global AI demand and transport and food-related supply concerns due to heatwaves, war and the upcoming super-El Niño, we see inflation staying above target for longer, not returning to price stability until beyond 2027.

This argues for further ECB rate hikes, and we have now added a December hike to the two hikes we already had for this year. Thursday's ECB meeting will likely see a rate hike being accompanied by relatively hawkish language, with no suggestions that the hiking cycle may be over.