ABN AMRO warns of persistent Eurozone inflation through 2027, citing ongoing food and goods price pressures that may force the ECB to maintain a restrictive interest rate environment.
Eurozone inflation hit 4% in October and ABN AMRO sees it rising further and staying elevated through 2027, which would keep the ECB from cutting rates and support the euro via higher-for-longer interest rates. However, the bank also sees looser labour market conditions and well-anchored expectations, so the hawkish case is not overwhelming.
If inflation stays high through 2027, the European Central Bank would likely keep interest rates higher for longer, which tends to support the currency.
Looser labour market conditions and well-anchored inflation expectations should prevent a repeat of the 2022-23 inflation dynamics, reducing pressure on the ECB to stay restrictive.
Sticky eurozone inflation, already at 4% in October and forecast to stay elevated through 2027, implies the ECB will keep interest rates high, which typically pushes eurozone benchmark yields up. The offsetting view is that expectations remain anchored and labour markets loosen, capping any yield rise.
If inflation stays elevated, the ECB is likely to keep rates high, which generally lifts eurozone benchmark yields such as the German 10-year.
ABN AMRO projects Eurozone inflation will remain elevated through 2027 as food and goods pipeline pressures offset easing energy costs. While the October inflation print hit 4%, the bank expects anchored expectations and a cooling labor market to prevent a repeat of the 2022-23 price surge. The European Central Bank's policy path remains contingent on wage growth and the potential for second-round effects.
The bank points to persistent food inflation and pipeline pressures for goods that continue to offset the easing of energy-related price shocks.
ABN AMRO cites a combination of looser labor market conditions and high interest rates, which should keep inflation expectations well-anchored.