By Yoruk Bahceli
LONDON (Reuters) – BNP Paribas expects the European Central Bank to hike interest rates by half a percentage point in the second half of next year as defence and infrastructure spending boost price pressures, it said on Wednesday.
The French bank said it had revised up its euro zone growth forecasts by 0.4 percentage points to 1.3% this year and 0.5 percentage points to 1.5% in 2026 on the back of a spending splurge in Germany as well as broader European plans to increase defence spending.
Euro zone inflation will average 2.2% this year and 2% next year, while core inflation will end 2026 at 2.5%, BNP said.
But this year, it still expects the ECB to cut its policy rate to 2% in June, from 2.5% currently.
“Continued disinflation in the short term and the predominantly growth-negative impact of higher U.S. tariffs should allow the ECB to continue to cut policy rates in the near term,” BNP Paribas said in a client note.
“Further ahead, we think the prospect of higher demand and higher inflation on the back of fiscal announcements, points to a higher medium-term policy rate.”
Traders expect the ECB to cut rates twice more to around 2% by December. They then price a small chance of a rate hike by September 2026, according to LSEG data.
(Reporting by Yoruk Bahceli; editing by Alun John)
