The European Central Bank is forecast to keep interest rates steady on Thursday and is expected to maintain that stance for the rest of the year as policymakers take comfort from tamed inflation in the Eurozone currency area.
Late last year the ECB left its key policy rate unchanged at 2% and revised up its growth projections, a development that market participants broadly interpreted as an indication that officials may not be in a hurry to alter borrowing costs. The central bank reduced rates repeatedly in 2025, bringing borrowing costs down from 3% in December 2024.
ECB President Christine Lagarde and other officials have consistently argued monetary policy is in a "good place," pointing to inflation anchored at the central bank's 2% target. Nonetheless, policymakers still face lingering uncertainties, including questions over the path of U.S. tariffs that could disrupt global trade.
In a client note published Wednesday, Deutsche Bank economists Mark Wall and Peter Sidorov wrote that, for now, their expectation is that rates will remain on hold through 2026. However, they said risks are tilted toward "further easing given the expected undershoot of the inflation target." Recent developments, notably the appreciation of the euro against a weakening U.S. dollar, have emphasized that risk, even if the analysts added the case for further reductions "has not been proven yet."
The Deutsche Bank team identified three scenarios that could convince the ECB to restart cuts this year: continued strengthening of the euro, a slowdown in Eurozone growth, and decelerating inflation. They also noted that the threshold for a policy response has been lowered by recent events, including geopolitical tensions over Greenland and concerns about imported disinflation from China.
"What happens next depends on the contest between external vulnerabilities and domestic resilience," the analysts wrote.
They summarized their central expectation by saying: "Our baseline assumes the latter dominates and the ECB stays on hold. But it’s fair to say that uncertainty around the path of monetary policy has increased."
Key implications for markets and sectors
- Financials - Banking and bond markets will be sensitive to any shift toward renewed easing, as changes in policy rates affect net interest margins and fixed-income valuations.
- Currency markets - The euro's trajectory is a clear transmission channel: further appreciation could intensify pressure on the ECB to cut.
- Trade-exposed sectors - Firms reliant on cross-border demand and supply chains may be vulnerable to shocks from tariffs or imported disinflation.