ECB Tightening Expectations May Be Overblown, Analysts Say

Investors may be pricing in too much tightening from the European Central Bank (ECB), according to Capital Economics analysts. They argue that a temporary inflation spike caused by higher energy prices is unlikely to generate persistent wage pressures, making interest rates high.

Capital Economics expects the ECB to raise its deposit rate again in December, taking it to 2.75% from 2.5%, but sees little need for further tightening after that. The firm predicts rate cuts will return to the agenda in the second half of 2027, with the deposit rate eventually falling to 2% in 2028.

The research firm notes that the euro zone's labour market is not particularly tight and demand is not running ahead of potential supply. As a result, 'second-round' effects on inflation through wages and profits are likely to be negligible, Capital Economics said.