Updated Growth And Inflation Outlook
Nomura expects euro area GDP growth to move above potential from mid-2026, linked to German fiscal spending and stronger performance in Spain. It also notes that services inflation is sticky but easing. Nomura forecasts two ECB rate rises in 2028 as growth runs above potential. It also states there is a risk of rate rises this year related to the Iran conflict. Nomura expects fiscal loosening in Germany this year. It adds that this could be offset by fiscal tightening in other countries. We see inflation proving stickier than anticipated, with the latest Harmonised Index of Consumer Prices (HICP) data for February showing a rise to 2.8%. This is largely driven by the ongoing conflict in Iran, which has pushed Brent crude oil above $95 a barrel for the first time since the fourth quarter of 2025. European natural gas prices have followed suit, adding to the upward pressure on costs across the economy.Implications For Rates Markets
Given these pressures, we see the European Central Bank holding a much more hawkish stance than previously expected. The narrative has shifted away from rate cuts, which were anticipated in late 2025 for the second half of this year. Instead, the risk of a rate hike before year-end is now becoming a tangible possibility. For derivative traders, this means interest rate swap markets may be underpricing the potential for higher rates through 2026 and 2027. Options that protect against or profit from a sudden hawkish move by the ECB, such as paying fixed on interest rate swaps or buying Euribor call options, are becoming more attractive. This is a strategy to position for inflation staying above the 2% target for an extended period. This isn’t just an inflation story; growth is also expected to accelerate above its potential from the middle of this year. We are seeing early signs of this, supported by confirmed fiscal stimulus in Germany and continued strong performance from the Spanish economy. This combination of rising inflation and solid growth gives the ECB more justification to keep monetary policy tight. Create your live VT Markets account and start trading now.
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