Nordea Sees Gradual Rate Hikes from European Central Bank Despite Market Expectations

According to Nordea's team, the European Central Bank (ECB) is likely to deliver two more 25bp rate hikes in December and March 2027, despite market pricing indicating a faster tightening path. The team notes that higher energy costs and Middle East risks have contributed to the increased rate expectations, but they still view a gradual, quarterly hiking path as consistent with current data and ECB communication.

The market has already priced in more aggressive rate hikes than Nordea's baseline forecast, which suggests two further 25bp increases from the ECB. Rapidly climbing energy prices and uncertainty over Middle East developments have driven this increased expectation. However, the team continues to believe that their forecast represents a reasonable baseline for the ECB.

While the central bank has not committed to any particular rate path, most paths still point upwards, albeit with no urgency in communication suggesting a faster pace of rate hikes than the quarterly pace assumed by the ECB. The team expects broader price pressures to emerge gradually, along with some second-round effects, but the current picture remains consistent with a gradual rise in interest rates.

Given the renewed escalation of the war in the Middle East and another notable increase in gas prices, risks to Nordea's baseline have tilted towards faster rate hikes, including a move as early as the next meeting in October.