Societe Generale economists Anatoli Annenkov, Michel Martinez, and colleagues project that Euro area inflation will remain above the European Central Bank's (ECB) target beyond 2027, with headline inflation expected to peak near 3.7-3.8% year-on-year and core inflation around 2.7-2.8% in mid-2027 [1]. The August flash euro area inflation reading rose by 0.4 percentage points to 3.3% year-on-year, marking its strongest level since late 2023 [1].
The economists attribute the persistent inflation to resilient economic activity, strong global AI demand, and supply concerns related to transport, food, heatwaves, war, and the anticipated super-El Niño event [1]. They note that indirect effects from the energy shock are beginning to impact consumer prices, further delaying a return to price stability [1].
In response to these inflationary pressures, Societe Generale expects the ECB to hike rates at its upcoming meeting this week and again in December, adding to the two hikes previously forecast for this year [1]. The economists anticipate that Thursday’s ECB meeting will feature a rate hike accompanied by relatively hawkish language, with no indication that the hiking cycle is concluding [1].
Overall, the analysis suggests that the ECB will maintain a restrictive monetary policy stance for an extended period, as inflation is not expected to return to target levels until after 2027 [1].
CONCLUSION
Societe Generale forecasts that persistent inflation will prompt the ECB to continue raising rates, with hikes expected both this week and in December. The market should anticipate a prolonged period of restrictive monetary policy, as inflation is projected to remain above target well beyond 2027.