ECB Hiking Cycle Likely to Extend as Inflation Persists, Nordea Warns

The European Central Bank’s (ECB) current hiking cycle is expected to extend beyond initial market expectations, according to a new analysis from Nordea. Economists Tuuli Koivu and Anders Svendsen argue that persistent inflationary pressures and a resilient labour market will compel the ECB to raise rates again in June, with further hikes likely to follow.

Persistent Inflation and a Tight Labour Market

Nordea’s assessment hinges on two key factors: inflation in the Eurozone is proving more stubborn than anticipated, and the labour market remains historically tight. Core inflation, which excludes volatile energy and food prices, has been slow to retreat from elevated levels, suggesting underlying price pressures are not yet under control. Meanwhile, unemployment in the bloc is at a record low, fueling wage growth that could keep inflation elevated for longer. The analysts contend that the ECB’s current communication, which has signaled a data-dependent approach, will ultimately force a more aggressive path than many investors have priced in.

Market Implications and Timing

Financial markets have been divided on the ECB’s next move, with some expecting a pause after the last rate increase. Nordea’s view adds weight to the hawkish camp, predicting the first move of this new cycle in June. The analysts highlight that the ECB is likely to prioritize bringing inflation back to its 2% target over concerns about a potential economic slowdown. This stance could lead to higher borrowing costs for businesses and households across the Eurozone, impacting everything from mortgage rates to corporate investment decisions.

What This Means for Investors and Consumers

For investors, an extended hiking cycle means reassessing fixed-income portfolios, as bond yields are likely to rise further. European equities, particularly in interest-rate-sensitive sectors like real estate and utilities, could face headwinds. For consumers, the immediate impact will be felt in higher loan repayments and savings rates. The Nordea forecast underscores that the era of cheap money is firmly over, and that the ECB’s fight against inflation is not yet won.

Conclusion

Nordea’s analysis presents a clear and compelling case for a longer ECB hiking cycle than currently anticipated. The combination of persistent core inflation and a robust labour market leaves the central bank with little room to ease policy. While the ECB remains data-dependent, the trajectory points toward further rate increases starting in June, a development with significant implications for the European economy and global financial markets.

FAQs

Q1: When does Nordea expect the ECB to raise rates again?
Nordea expects the ECB to begin a new hiking cycle in June, with further increases likely to follow.

Q2: What are the main reasons for Nordea’s forecast?
The forecast is based on persistent core inflation in the Eurozone and a very tight labour market, which is fueling wage growth.

Q3: How might this affect European consumers?
Consumers can expect higher borrowing costs for mortgages and loans, as well as potentially higher savings rates, as the ECB continues to tighten monetary policy.