Euro area: ECB policy outlook and stagflation risks – Standard Chartered

Another 25bps ECB rate hike is expected in December, according to Standard Chartered’s Christopher Graham. Excluding Ireland, Euro area GDP growth has slowed steadily since Q4-2025 as inflation continues to climb. Graham sees increasing stagflation risks, although conditions do not yet meet that definition. Higher energy prices and the lagged effects of ECB tightening are key headwinds. He expects inflation to start falling early next year.

Slower Growth, Rising Inflation

"Eurostat data released this morning showed euro area headline inflation rising to 4.0% y/y in October, above our expectation of 3.8%. This signals upside risks to the European Central Bank’s (ECB’s) September projection of 3.6% average inflation in Q4."

"Stripping Ireland out, euro area GDP growth was a more modest 0.2%, and, crucially, growth momentum has been falling steadily since Q4-2025."

"The combination of weakening growth momentum (using euro area ex Ireland data) and still-rising inflation creates a growing policy dilemma for the ECB. Inflation dynamics (and the risk of second-round effects) will likely dominate for now, underpinning our expectation of another 25bps hike at the December meeting."

"Stagflation is not our base case; we expect growth to remain positive and inflation to begin falling early next year."

"But the direction of travel is that way, and the forces that could produce stagflation in coming quarters are apparent: higher energy prices that are squeezing real income and weighing on corporate profit margins; ECB monetary tightening operating with lagged effects on household and corporate borrowing costs; and tighter financial conditions weighing on broader activity."

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