Rising energy prices lifted euro area inflation in September, but Rabobank expects the European Central Bank (ECB) to wait until December before raising rates, citing tighter financial conditions and limited spillover into other prices.
The bank forecasts a hold at 2.50% on Oct. 29, followed by a 25-basis-point increase to 2.75% on Dec. 17. Senior macro strategist Bas van Geffen said, “There is no compelling reason to accelerate the pace of hikes.” Rabobank describes the December move as the likely final increase in the current cycle.
Eurostat, the European Union’s statistical office, reported that prices rose 3.8% year over year in September, compared with 3.2% in August. Energy prices rose 18.9% from a year earlier and accounted for 1.71 percentage points of the annual inflation rate.
A Reuters poll conducted Oct. 5-8 found that 70 of 73 economists expected the ECB to hold rates at its October meeting; 64 expected a quarter-point increase in December. The ECB raised its three key rates by 25 basis points in September, with the deposit rate set at 2.50% from Sept. 16. Its Governing Council said it would decide meeting by meeting based on incoming data and “is not pre-committing to a particular rate path.”
In an Oct. 5 speech, ECB Executive Board member Philip R. Lane said energy costs were the main driver of the inflation increase. He said underlying indicators had not pointed to a medium-term upward shift so far, but delayed pass-through from energy costs could keep non-energy inflation higher. ECB staff projected non-energy inflation would average 2.6% in 2027, partly reflecting that pass-through. Lane’s views do not necessarily represent the Governing Council.
Van Geffen points to tighter financial conditions and a lack of broad spillover from energy prices into wages and other prices as reasons for a gradual approach. Rabobank also cited higher long-term yields and turmoil in French bond markets as factors weighing on financial conditions.
Lane said an energy price shock can reduce household real incomes and company profits. He added that rapid price-adjustment mechanisms observed during 2022 had not been activated so far in the current shock.
The ECB’s next meeting is scheduled for Oct. 28-29, followed by a meeting on Dec. 16-17. Eurostat is due to publish its flash estimate of October inflation on Nov. 4.
