Meanwhile, the European Central Bank (ECB) is walking a tightrope of high, stable inflation. In November, the euro area’s flash estimate of inflation comes bang on target at around 2% year-on-year. Current market expectations suggest that the ECB will maintain its interest rates throughout 2026, remaining on hold unless unexpected economic shocks arise.
Nordea’s market journalists forecast that the ECB will hold rates steady through the end of March. They do project modest rate increases beginning in 2027. We continue to forecast stronger economic growth, along with a more supportive fiscal policy over the short term. This should power GDP growth in the 1.5%-to-2.0% range during 2026-2027.
In the euro-area, the labour market continues to be resilient, with the unemployment rate stuck just above all-time lows. This excessively tight labour market has added to inflationary pressures. The result is services price inflation has shot up to 3.5 percent y-o-y. This increase represents a record high for the month, despite the monthly rate of change continuing to moderate somewhat.
“The labour market remains tight, though, with the unemployment rate still close to all-time lows.”
Analysts warn that inflation will continue to climb. They explain this possible increase as a result of the interaction of fiscal policies and growth enhancing policies. Nordea’s market reporters, Anders Svendsen and Tuuli Koivu, describe the ECB’s isolated position as the last bastion among central banks. First, they argue that the ECB’s optimistic rate upward forecast is directly connected with these positive developments.
“We are the odd ones out with an upwards trajectory stemming from easier fiscal policy and stronger growth ahead (GDP up by 1.5% and 2.0% in 2026-2027).”
The ECB’s wage tracker indicates a deceleration in negotiated wage growth for next year. This long-run trend might serve to keep services price inflation lower in the long haul.
“The ECB’s wage tracker points to lower growth in negotiated wages during next year, which should add downward pressure on services price inflation in 2026.”