Deutsche Bank expects ECB’s next rate move only in 2026, and it’s a hike

The European Central Bank is signaling comfort with its 2% policy rate, a stance largely aligning with market expectations and Deutsche Bank's view of 2% as the terminal rate, with a potential rate hike not anticipated until late 2026. Despite ECB staff revising down 2027 headline and core inflation forecasts to 1.9% and 1.8% respectively, President Lagarde dismissed these as minimal deviations. While 2025 growth forecasts were raised to 1.2% and overall growth risks are more balanced, Deutsche Bank cautions about a potential for further easing within 6-9 months should inflation expectations de-anchor during an anticipated undershoot in early 2026.

Analysis

The European Central Bank is signaling a prolonged policy pause, with its 2% rate now widely considered the terminal rate for this cycle, a view that aligns with Deutsche Bank's analysis and current market pricing. This stance is supported by internal ECB projections, as President Lagarde dismissed downwardly revised 2027 inflation forecasts (1.9% headline, 1.8% core) as a "minimal deviation" irrelevant to policy. Furthermore, the central bank's upward revision of the 2025 growth forecast to 1.2% and a declaration of "more balanced" growth risks—partly due to diminished trade uncertainty from the EU-US trade deal—reinforce a stable outlook. Consequently, Deutsche Bank's baseline forecast anticipates the next policy move will be a rate hike, but not until the end of 2026. However, a key risk exists for a dovish pivot within 6-9 months if a potential inflation undershoot in early 2026 causes inflation expectations to de-anchor from the ECB's target.

Key Decisions for Investors

• Given the ECB's stable policy outlook and upgraded 2025 growth forecast, investors may consider the moderately supportive environment for European equities, particularly in sectors sensitive to predictable interest rates and improving economic momentum.
• For fixed income and currency traders, the ECB's firm stance at 2% suggests European sovereign bond yields may remain range-bound and could provide a supportive floor for the Euro against currencies with more dovish central banks.
• It is crucial to monitor Eurozone inflation data and forward-looking inflation expectation surveys over the next six to nine months, as a de-anchoring of expectations is the primary identified catalyst that could force the ECB into a premature easing cycle, contrary to the current baseline.