ECB’S NAGEL: SEPTEMBER BASELINE HAD INFLATION PEAKING AROUND THE TURN OF THE YEAR AND STAYING ABOVE TARGET WELL INTO 2027.SINCE THEN, THE OUTLOOK HAS DETERIORATED

Bundesbank President Joachim Nagel said the ECB's September baseline projected inflation peaking around the turn of the year and remaining above the 2% target well into 2027, and that the outlook has since deteriorated. The reported shift implies that the inflation path being priced into the policy framework has moved higher and more persistent than the September projections assumed. Through the rates channel, a longer period of above-target inflation raises the probability that the ECB holds policy rates restrictive for longer, which tends to widen the rate differential against markets where easing is further advanced and supports the euro while pressuring rate-sensitive assets. Euro-area government bond yields, particularly at the front end of the curve, are most directly exposed to repricing of expected ECB rate paths, while European equities with high rate sensitivity, such as real estate and utilities, face valuation pressure from higher discount rates. The next concrete catalyst is the flash euro-area HICP inflation estimate, whose monthly prints will be scrutinized for whether they confirm the upward revision to the inflation trajectory Nagel described.

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