Deutsche Bank is maintaining its call for a 1.50% terminal rate in the European Central Bank’s (ECB) easing cycle but notes rising risks that the cycle may end sooner than previously expected. As the second half of the year unfolds, the bank expects market focus to shift away from near-term rate cuts and toward how much tightening may follow in the coming years.
The bank has revised its 2025 euro area GDP growth forecast higher, from 0.5% to 0.8%, citing the economy’s resilience despite the drag from U.S. tariffs. Still, it continues to expect inflation to fall below the ECB’s 2% target in 2025 and sees scope for further rate cuts — though it concedes the case for a 1.50% terminal rate is weakening.
Looking further ahead, Deutsche Bank sees 2026 as a turning point, with increased European defence spending bolstering the case for strategic autonomy and what it describes as “EU exceptionalism.” It expects the ECB to begin hiking again by the end of 2026, taking the policy rate to 1.75%. In April, the bank also raised its 2027 terminal rate call to 2.50%, driven by fiscal commitments to defence and the possibility of a higher neutral rate.
The evolving policy mix, shaped by geopolitical developments and structural spending shifts, may ultimately support a more hawkish ECB path than markets currently price.
European Central Bank deposit rate cut cycle so far. A cut is expected today to 2%.
This article was written by Eamonn Sheridan at www.forexlive.com.
