Can the Eurozone Tolerate Higher Rates for Long?

The ECB has already responded to the recent energy shock with another rate hike, but the euro-area economy looks less able to absorb prolonged tightening than it did in past inflation episodes. Wage growth and job vacancies are easing, gas prices remain well below crisis peaks, and inflation expectations are still anchored, which suggests this shock may be more contained than the Ukraine-driven surge.

That makes a long stretch of restrictive rates look harder to justify. While markets expect euro rates to stay elevated for years, we think that path could weigh on growth and prove counterproductive if energy pressures fade.

Our base case is for one more hike at most, followed by cuts back toward neutral in 2027 as inflation normalizes. For investors, the key risk is not just higher rates themselves, but how long policymakers keep them there despite a softer economic backdrop.