The European Central Bank (ECB) is expected to cut borrowing costs two more times, with analysts surveyed by Bloomberg now forecasting the deposit rate to stabilize at 2% rather than fall below that threshold.
Following six consecutive rate cuts, back-to-back reductions in April and June remain the consensus view. However, unlike previous expectations for a further cut to 1.75% by March 2026, analysts now believe the ECB will hold rates at 2% for the foreseeable future.
Key Factors Driving the Shift in Rate Expectations:
Increased Government Spending: European governments are ramping up investments in defense and infrastructure, which could stimulate economic growth but also fuel inflationary pressures. Germany, in particular, is set to inject hundreds of billions of euros into its infrastructure.
Inflation Concerns: Some policymakers, such as Austria’s Robert Holzmann, have suggested that the ECB may need to halt rate cuts or even consider hikes if inflation accelerates due to higher fiscal spending.
Market Uncertainty: Investors have scaled back bets on aggressive monetary easing, with some now anticipating a possible pause in April.
Economic and Inflation Outlook:
Growth Projections: The euro-zone economy is forecast to grow at 0.9% in 2025, 1.2% in 2026, and 1.5% in 2027, aligning closely with ECB estimates.
Inflation Expectations: Inflation is projected at 2.2% in 2025, 2.0% in 2026, and 2.1% in 2027, slightly higher than previous forecasts.
Despite the ECB’s cautious approach, fiscal stimulus measures could provide a much-needed boost to economic activity. However, external risks—such as potential tariffs—remain a key downside factor for growth. Traders will be closely watching the ECB’s next moves as policymakers navigate the balance between economic support and inflation control.
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