ECB Warns of Longer-Lasting Inflation Shock Amid Interest Rate Hikes

The European Central Bank (ECB) recently raised its policy rate by 25 basis points to 2.50%, in line with expectations.

In addition, new forecasts from ECB economists indicate that underlying core inflation will remain above the 2% target until at least 2028, even with a peak policy rate of around 3%.

The ECB sees several factors contributing to higher inflation expectations, including a longer-lasting energy price shock, stronger-than-expected real GDP growth in the euro area, and rising food prices.

While market expectations suggest two additional interest rate hikes, there is a growing risk that the ECB may need to tighten policy further to address the inflation shock.