Eurozone: Inflation to Stay Elevated Until 2027 - ING and ABN AMRO

Bert de Vries, senior economist at ABN AMRO, noted that the eurozone's inflation rate rose to 2.5% year-on-year in March, driven mainly by higher gasoline and energy prices, while core inflation eased to 2.3%. He expects inflation to break above the 3% peak in the coming months as the pass-through effects of energy and food prices materialize.

**Overlapping supply-side shocks keep inflation sticky in the near term**

The institution's analysis suggests that current inflationary pressures stem primarily from overlapping supply-side shocks, including energy, food, and supply bottlenecks. Despite a pullback in core inflation, the upward trend in headline inflation may only be the beginning. In its July monthly outlook, ABN AMRO noted that against this backdrop, inflation will remain elevated in the coming months, prompting central banks to maintain a hawkish stance. It expects the European Central Bank to deliver a final rate hike in September, raising the deposit rate to 2.50%.

**Policy tightening persists; shift to easing still distant**

ABN AMRO expects the ECB's rate hikes to anchor inflation expectations, as core inflation is projected to stay high. However, the bank also believes second-round inflation effects will be contained, and it anticipates that only by early 2027 will the ECB have sufficient confidence in the inflation outlook to begin gradually cutting rates. This assessment aligns with current market concerns over a prolonged tightening cycle.

**Recession risks complicate policy balancing act**

Notably, elevated inflation is running parallel to an economic slowdown. According to a previous Bloomberg report, the eurozone's CPI surged to a record 10.7% year-on-year in October 2022, while Q3 GDP growth slowed to 0.2%. Although the latest data is far below that peak, persistent price pressures combined with weak growth make the ECB's policy balancing act between curbing inflation and avoiding a deep recession increasingly challenging.