ECB Rate Hikes Remain on Table as War-Driven Inflation Persists, Nomura Says

Analysts at Nomura have cautioned that the European Central Bank (ECB) is likely to keep interest rate hikes on the table as war-driven inflation continues to exert upward pressure on prices across the eurozone. The warning comes amid ongoing geopolitical tensions and persistent energy cost shocks that have complicated the ECB’s path toward price stability.

War-Driven Inflation Remains a Key Concern

According to a recent note from Nomura, the inflationary impact of the conflict in Ukraine and related sanctions has not fully dissipated, leaving the ECB with limited room to pivot toward a more accommodative stance. Energy prices, while lower than their 2022 peaks, remain elevated relative to pre-war levels, and supply chain disruptions continue to feed through to consumer prices.

The analysts argue that core inflation — which excludes volatile food and energy costs — has proven stickier than anticipated, driven by rising wages and services prices. This persistence, they say, keeps the door open for further rate increases if data in the coming months does not show a clear and sustained decline toward the ECB’s 2% target.

Market Expectations vs. Central Bank Reality

Financial markets have recently priced in a peak in ECB rates, with some investors expecting cuts as early as 2024. However, Nomura’s analysis pushes back against this optimism, suggesting that the ECB will prioritize inflation control over growth support in the near term.

ECB President Christine Lagarde has repeatedly emphasized that decisions will remain data-dependent, but Nomura notes that the central bank’s own projections still show inflation above target through 2025. This gap between market pricing and official forecasts creates a risk of policy surprises, particularly if energy prices spike again due to winter demand or further geopolitical escalation.

Implications for Borrowers and Investors

For households and businesses across the eurozone, the prospect of continued rate hikes means borrowing costs — from mortgages to corporate loans — are likely to remain elevated. This could further dampen economic activity, which has already shown signs of slowing in key economies like Germany and France.

Investors, meanwhile, face a landscape where bond yields may stay higher for longer, and equity valuations could come under pressure from tighter financial conditions. Nomura advises clients to prepare for a scenario where the ECB holds rates at restrictive levels through most of 2024, rather than cutting them as markets currently anticipate.

Conclusion

Nomura’s assessment underscores the complex challenge facing the ECB: balancing the need to contain war-driven inflation against the risk of tipping the eurozone into recession. With no clear resolution to the geopolitical drivers of price pressures in sight, the central bank’s focus on rate hikes appears set to continue, even as economic headwinds intensify. For readers, the key takeaway is that the era of cheap money is unlikely to return soon, and both consumers and investors should plan for a prolonged period of tight monetary policy.

FAQs

Q1: Why does Nomura believe the ECB will keep raising rates?
Nomura points to persistent war-driven inflation, particularly from energy costs and supply chain disruptions, as well as sticky core inflation driven by wages and services. They argue that until inflation shows a clear and sustained decline toward the 2% target, the ECB is unlikely to pause or reverse its hiking cycle.

Q2: How might continued ECB rate hikes affect the average consumer?
Higher rates increase the cost of borrowing for mortgages, car loans, and credit cards. They can also lead to higher savings account yields, but overall, consumers may face tighter budgets as loan repayments rise and economic growth slows.

Q3: What is the difference between market expectations and Nomura’s outlook?
Markets have priced in a peak in ECB rates and anticipate cuts in 2024. Nomura, however, believes the ECB will hold rates at restrictive levels for longer, possibly through most of 2024, due to stubborn inflation. This mismatch could lead to market volatility if the ECB acts more hawkishly than expected.