ECB Rate Hikes May Be Overestimated, S&P Warns

Sylvain Broyer, S&P's chief economist for Europe, the Middle East and Africa (EMEA), believes financial markets have misjudged the European Central Bank's (ECB) intentions. The ECB has already increased interest rates twice since June, but Broyer thinks they will only increase by a quarter of a point in December and possibly again in March.

Broyer expects high inflation to dampen consumer demand, leading to lower consumer price growth, which could prompt the ECB to resume rate cuts as soon as 2028. He also stated that what money markets are currently pricing as a macroeconomic baseline is strong inflation, and demand taking no hit from inflation.

According to S&P's analysis, European economies have proven more robust than expected since the Iran war began in February. However, Broyer cautioned that resilience among consumers 'may not last'. The ECB targets an inflation rate of about 2 per cent, which is higher than the current rates in Germany (3.3%), Italy (4.1%), France (3.4%), and Spain (5%).