Bank of Greece: markets expect 0.75% rate hike in 2026

As highlighted in the analysis, until the previous month markets had been pricing in that the European Central Bank would proceed with two interest rate increases of 0.25% each (a cumulative 0.5%) during 2026. However, expectations have since shifted, with markets now pricing in three successive 0.25% hikes by the ECB, followed by a period of rate stabilisation in 2027.

In a similar development, markets are no longer pricing in any interest rate cuts by the Federal Reserve by year-end, and are instead beginning to price in a possible rate increase in the first half of 2027.

The Bulletin notes that global inflationary pressures remain elevated, primarily driven by persistently high energy commodity prices linked to the ongoing war in the Middle East. Over the past month, inflation expectations derived from market instruments have moved higher. Nevertheless, medium- to long-term market-based inflation expectations in the euro area, although slightly increased, remain anchored at the European Central Bank’s target.

Markets have also revised upward their expectations for the future path of interest rates in both the euro area and the United States.

Harmonised Index of Consumer Prices (HICP) inflation rose markedly in April to 3.0% in the euro area (flash estimate) and to 4.6% in Greece, while inflation in the United States climbed to 3.8%. April marked the second consecutive month in which the impact of the conflict was clearly reflected in inflation dynamics, mainly through energy prices.

Energy commodities continued their sharp upward trajectory over the month, driven by heightened concerns over supply disruptions and escalating geopolitical tensions. Although prices temporarily eased following expectations of diplomatic de-escalation in the Middle East, they remain elevated and volatile, with persistent uncertainty sustaining a significant geopolitical risk premium.

At the domestic level, according to the April PMI, input cost inflation in the manufacturing sector accelerated at its fastest pace since June 2022, driven by rising transport, raw material, and energy costs linked to the conflict. Output prices increased at the strongest rate in three and a half years, as firms sought to pass higher costs through to customers.

The April business survey points to higher selling price expectations in manufacturing, retail, and construction, while expectations edged slightly lower on a monthly basis in the services sector.