European Views Not So Fast

Economics Research 18 September 2026 | 10:34PM BST

1. We expect the ECB to deliver an additional rate hike in December, taking the Sven Jari Stehn | deposit rate to 2.75%. First, the Euro area’s recent growth resilience is encouraging. Goldman Sachs International

H1 turned out notably better than expected, with an annualised growth rate of 1.2% despite the energy shock. This resilience likely reflects reduced sensitivity to energy prices, expansionary fiscal policy in Germany and spillovers from the global AI cycle. We therefore made only small changes in response to the recent surge in energy prices and expect growth to strengthen further into 2027, rising from 1.0% on a Q4/Q4 basis this year to 1.4% next year.

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Exhibit 1: Euro Area Growth Has Been Resilient

Source: Goldman Sachs Global Investment Research, Haver Analytics

2. Second, the renewed energy pressures are sizeable, as natural gas prices have almost doubled since June and product spreads have widened further. Moreover, our commodities team sees the risks to energy prices as tilted to the upside, especially for TTF gas prices in the event of a cold winter. The outlook for food prices has also firmed since the summer, following unusual weather patterns. We therefore raised our inflation forecast and now see headline inflation peaking at 3.8%yoy in Q4.

Exhibit 2: The Renewed Energy Pressures are Sizeable

Source: Goldman Sachs Global Investment Research, Haver Analytics, ECB

3. Third, the economy’s resilience this year supports the notion that the neutral policy rate (or r*) might have risen. Bank lending growth remains robust despite this year’s hikes and the global backdrop looks supportive of higher rates, including higher global equity prices, an uptrend in short-term rates and global competition for capital. Consistent with this, estimates of r* have generally risen and a range of model estimates recently shown by the IMF averaged around 2.5% in nominal terms.