New Delhi: The European Central Bank (ECB) is expected to raise interest rates by a cumulative 50 basis points by the first half of 2027 as elevated energy prices and persistent services inflation keep price pressures above target, according to a research report by ICICI Bank Global Markets.
The report said the ECB could deliver another 25 basis points rate hike before the end of 2026, followed by a further 25 basis points of tightening in the first half of 2027, assuming energy and commodity prices remain elevated.
Eurozone headline inflation, measured by the Harmonised Index of Consumer Prices (HICP), accelerated to 3.8 per cent year-on-year in September from 3.2 per cent in August, driven largely by a sharp increase in energy prices.
Energy inflation rose to 18.9 per cent in September from 14.3 per cent in the previous month, while prices increased 4 per cent month-on-month, marking their fastest pace of growth in six months.
The report attributed the surge to geopolitical disruptions in West Asia, warning that oil and gas prices could remain elevated for longer amid continuing tensions.
Underlying price pressures also persisted, with core inflation rising marginally to 2.5 per cent in September from 2.4 per cent in August. Services inflation increased to 3.2 per cent from 3 per cent, indicating continued domestic price pressures that could slow the return of inflation to the ECB's 2 per cent target.
However, core goods inflation remained unchanged at 1.2 per cent, suggesting that the pass-through of higher energy costs into core goods prices had remained relatively contained so far.
The report said this trend offered some relief but warned that indirect effects from rising energy and transportation costs warranted monitoring.
Transport prices emerged as a major contributor to headline inflation, rising 9.8 per cent year-on-year in September compared with 7.8 per cent in August. Prices in the housing, water, electricity, gas and other fuels category also accelerated to 5.3 per cent from 4.3 per cent.
Food inflation edged up to 1.1 per cent in September from 0.8 per cent in August, partly reflecting a sharp increase in vegetable prices.
ICICI Bank said the combination of elevated energy costs and sticky services inflation could complicate the ECB's efforts to bring inflation back to target, strengthening the case for further monetary tightening.