Inflation is forecast to fall to 2% in 2025

Inflation has been declining since the summer, and headline and core inflation are projected to return to a sustainable 2% rate by the end of next year as services inflation cools.

“The outlook for inflation, however, remains notably uncertain,” Stehn writes. Depreciation in the euro could indicate stickier-than-expected inflation pressures. On the other hand, inflation could be more subdued amid a weakening job market and in the event of higher-than-expected US tariffs on China, which could incentivise China to sell excess goods at reduced prices into Europe.

Slow economic growth and declining inflation will likely pressure the European Central Bank to cut interest rates. Goldman Sachs Research expects the Governing Council to cut the deposit rate to 1.75% in July (from 3.25% in October). While 25 basis point cuts are more likely than 50 basis point reductions, there’s a “a low hurdle for a step-up in the pace in Q1 if the growth and inflation data disappoint notably,” Stehn writes.

Former ECB head Mario Draghi has identified policies that could help boost productivity and GDP expansion in Europe, but there are significant hurdles for implementation, particularly when it comes to joint EU funding. “However, we see scope for additional EU defence spending and some regulatory harmonisation from next year,” Stehn writes.

 

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