A senior S&P Global Ratings economist has said financial markets have got it wrong by pricing in four more quarter-of-a-percentage-point rate hikes by the European Central Bank (ECB) over the next 12 months.
Speaking at an event in Dublin on Wednesday, Sylvain Broyer, S&P’s chief economist for Europe, the Middle East and Africa (EMEA), said the world’s largest debt ratings agency sees the ECB increasing its main rates by a quarter of a point – or 25 basis points – in December and possibly again in March.
Broyer said he sees the ECB resuming rate cuts in early 2028 after a period of high inflation dampens consumer demand, leading to an easing of consumer price growth.
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“What money markets are currently playing as a macroeconomic baseline is strong inflation – and demand taking no hit from inflation. That’s not very likely,” he said. “There is some work for central banks to do, but definitely not as much as is expected [by the markets] right now.”
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The ECB has pushed through two quarter-point increases since the middle of June after becoming the first big central bank to tighten monetary policy in the face of the Middle East conflict stirring inflation.
The largest economies in the euro zone individually reported on Wednesday that consumer prices are continuing to rise due to the energy-price shock of the Iran war.
German inflation rose to an annual rate of 3.3 per cent in September, the fastest since 2023, while consumer prices jumped by 4.1 per cent in Italy, 3.4 per cent in France and 5 per cent in Spain. The ECB targets inflation of about 2 per cent.
The market interest rate – or yield – on Germany’s 10-year bonds, a euro-zone benchmark, hit a 17-year high of 3.64 per cent on Monday, while the yield on similar Irish debt reached a 13-year high of 3.74 per cent the same day. The yield on 10-year US treasuries hit 5.27 per cent on Wednesday, the highest since 2003.
ECB president Christine Lagarde appeared to suggest on Monday that the money markets have got ahead of themselves in pricing in rate hikes.
“We see higher inflation ahead but no signs yet that it is becoming embedded,” she told a European Parliament committee hearing in Brussels. “We do not see evidence at this stage of energy prices feeding into higher wages. This means that while the shock is too large to look through, we view a measured response as appropriate to keep inflation in check.”
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While the US Federal Reserve increased rates last month for the first time in three years, a top official on its rates-setting committee, New York Fed president John Williams, suggested on Tuesday that it could wait until December before raising rates again. This is at odds with market bets on a follow-up increase next month.
Meanwhile, Broyer said that European economies have proven to be more robust than expected since the Iran war began in February, but that resilience among consumers “may not last”.
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S&P moved in March to upgrade its view of Ireland’s creditworthiness to AA+, one level below its top-notch AAA grade for the first time since early 2009.
S&P now has the highest rating on Ireland of any of the leading credit agencies. S&P cited several factors, including the State’s strong economic and budgetary performance, a strengthening of fiscal buffers, and an ongoing decline in its debt relative to the size of the economy.
