The era of interest rate cuts in the eurozone may be over, according to a new analysis from Deutsche Bank. The bank assessed the latest meeting of the European Central Bank (ECB) and concluded that policymakers have likely completed their easing cycle, barring unexpected developments.
Markets are already pricing in reduced chances of further cuts, in line with Deutsche Bank’s central estimate that the ECB’s final rate will settle around 2%. While risks of additional monetary easing remain, the bank sees these as limited.
Following the recent EU–U.S. trade agreement, Deutsche Bank revised its forecasts, reinforcing its view that the 2% level marks the floor. However, if inflation expectations drift away from the ECB’s target during the expected decline in 2026, further cuts cannot be fully ruled out.
Inflation outlook
In its latest projections, the ECB lowered its inflation forecasts for 2027, with headline inflation at 1.9% and core inflation at 1.8%—a minor undershoot of the official 2% target.
President Christine Lagarde described this as only a “minimal deviation,” stressing it would not trigger a policy shift. She noted that a stronger euro had mechanically lowered inflation, but argued this was not a permanent trend.
Economic resilience
The ECB expects the eurozone economy to grow by 1.2% in 2025, followed by a slight slowdown to 1% in 2026. While external pressures—such as U.S. tariffs and a stronger euro—pose risks, domestic factors like a resilient labor market and robust demand are seen as key supports.
Lagarde highlighted increased government spending in Germany, particularly on defense and infrastructure, as a driver of future eurozone growth.
Waiting with flexibility
Describing the ECB’s current position as being in a “good place,” Lagarde said the central bank would remain on hold, guided by economic data rather than pre-set decisions.
This cautious stance signals that the bar for further rate cuts is now higher than markets once assumed. By late 2026, the ECB expects to pivot back to gradual rate hikes, focusing again on medium-term inflation risks above the 2% target.
Deutsche Bank emphasized that the ECB’s strategy remains anchored in stability, with 2% as the terminal rate for the current policy cycle. While the possibility of future easing lingers, stronger fiscal support in countries like Germany is expected to help keep inflation expectations aligned with the ECB’s target.