Eurozone: Energy shock reshapes outlook – Rabobank

Rabobank strategists Bas van Geffen and Elwin de Groot highlight that sharply higher Oil and natural gas forecasts will lift headline Eurozone inflation by about 0.5 percentage points in 2026 and 2027. They now see inflation peaking around 4.4% year-on-year in early 2027, with core inflation only modestly higher, and expect sluggish disinflation to keep the ECB deposit rate near 2.50% until at least 2028.

Higher energy lifts headline inflation

"These revisions have a significant impact on our inflation forecasts. Based on these higher prices for oil products and natural gas, our inflation models predict 0.5 percentage point stronger headline inflation across this year and next."

"We now expect inflation to peak at 4.4% y/y in January and February, after which base effects should gradually lessen the impact of energy prices on the inflation rate. This takes our inflation forecasts to 3.1% for 2026 and 3.5% for 2027."

"Whereas we revised our headline inflation forecast significantly, we only see 0.1pp higher core inflation. This is mostly due to the direct and indirect effects of higher energy prices, as well as the assumption that the war in the Middle East will lead to somewhat higher supply chain pressures in coming months."

"If economic activity stays resilient through the fourth quarter and energy inflation remains high, employees could demand higher pay increases to compensate for the loss of purchasing power. With inflation likely to peak around 4.5% early next year, that risk is non-negligible."

"Having said that, we do believe that core inflation will be sluggish on the way down. We therefore think that the ECB will leave the deposit facility rate at the upper end of the neutral range for some time, and rate cuts below 2.50% will probably not happen before 2028."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)