Key Takeaways
- Markets expect no further cuts in 2025 and only a marginal move in 2026.
- Inflation is broadly on target, while growth remains subdued.
- Some analysts see upside inflation risks, raising the possibility of a rate hike instead of a cut in 2026.
The European Central Bank seems close to concluding its rate-cutting cycle, with most analysts and investors expecting no rate change at the Dec. 18 meeting and only a slim chance of an additional quarter-percentage-point cut in 2026.
The ECB began easing in June 2024, and has since delivered eight rate cuts, lowering the deposit rate from 4.00% to 2.00%. Since June 11, the three key policy rates are:
- Deposit Facility Rate: 2.00%
- Main Refinancing Operations: 2.15%
- Marginal Lending Facility: 2.40%
How Many More ECB Rate Cuts Does the Market Expect?
Money markets are pricing in an implied rate of 1.852% at the end of 2026, essentially unchanged from Nov. 21’s level. That means markets do not expect a 0.25 percentage point rate cut.
This aligns with the ECB’s message that inflation is contained. Eurozone inflation stood at 2.1 % in October, and underlying measures remain consistent with the ECB’s medium-term 2% target.
“The latest ECB press conference was clear: The ECB sees itself ‘in a good place.’ The data support this view: There is no urgent pressure to act, and the rate outlook is therefore unchanged,” says Oliver Eichmann, head of rates, EM & short duration, fixed income EMEA at DWS.
Growth, however, adds a layer of complexity—though price stability is the ECB’s single mandate. “The ECB is quite hawkish on growth, believing GDP growth will be weaker in 2026 than in 2025, while at the same time believing that inflation will fall as low as 1.7% next year,” says Michael Field, European markets strategist at Morningstar.
“But if inflation is set to undershoot, and growth is weak, then there is nothing holding the ECB back from further rate cuts. A theory that tallies with economists’ expectations, with some pointing to a further 50 basis points in cuts over the next 12 months.”
The December meeting will be closely watched, with ECB staff presenting new forecasts on eurozone inflation and growth, including a 2028 projection for the first time.
ING’s chief economist Carsten Brzeski warns that risks such as delayed US-tariff effects, a stronger euro, French political uncertainty and slow German fiscal stimulus could justify one or two additional cuts. “In any case, even if the ECB seems to rest more comfortably on its laurels than before, the December staff projections will be crucial and could still disrupt its good place. If the 2028 inflation forecasts come in sub-1.7%, the likelihood of yet another rate cut would increase,” Brzeski adds.
DZ Bank even expects an immediate move, projecting a 0.25-point cut in December and no further action in 2026 as inflation falls to 1.9%.
Goldman Sachs, by contrast, expects the ECB to maintain its deposit rate at 2% through 2026, unless inflation softens sharply. “We expect the ECB to maintain its 2% rate, given at-target inflation and German fiscal expansion, though we do not rule out a return to rate cuts if inflation begins to moderate,” the bank notes in its 2026 investment outlook.
Will the ECB Raise Rates in 2026?
A minority of voices warns that the bank’s next move could in fact be a rate hike. Austria’s central bank governor Martin Kocher sees an “equal chance” for a rate cut or hike as the ECB’s next move.
ECB executive board member Isabel Schnabel warns that eurozone inflation risks have shifted to the upside, as the economy gains momentum and governments ramp up military and infrastructure spending. She expects a recovering economy, a closing output gap and a significant fiscal impulse, concluding that inflation risks are now “tilted slightly upward.”
Deutsche Bank Research echoes this view, saying: “We consider a first rate hike of 25 basis points as early as the end of 2026 possible, partly due to looming inflationary pressure from Germany’s expansionary fiscal policy and structural labor market bottlenecks.”
Inflation Set to Undershoot in 2026—But Risks Point Both Ways
The ECB’s base case, however, is that inflation will undershoot. The staff’s current projection from June sees inflation stabilizing at 2.1% in 2025 and undershooting at 1.7% in 2026. Core inflation, which excludes energy and food prices, is expected at 2.4% in 2025, 1.9% in 2026, and 1.8% in 2027. Most forward-looking indicators support this disinflation trend, with wage growth moderating, productivity improving thanks to digitalization and AI, and energy and food inflation easing. Currency trends could reinforce the trend as a weaker US dollar may nudge eurozone inflation below target.
DWS’s Eichmann expects an inflation rate of 2.1% this year and 2.0% in 2026, “essentially the ECB achieving its target.”
But Schnabel’s warning highlights upside risks, making December’s first 2028 inflation estimate pivotal for the next policy move.
What Is the Outlook for Eurozone Growth in 2026?
Growth is set to remain modest, with analysts expecting a slight pickup in 2026 as the German fiscal stimulus arrives. The ECB’s June projections foresee real GDP rising 0.9% in 2025, 1.1% in 2026 and 1.3% in 2027. DWS forecasts around 1.1% growth in 2026, which Eichmann calls “anemic, sluggish growth—but without additional inflationary pressure.”
The transmission of the ECB’s cuts is also still unfolding. “We shouldn’t underestimate that the transmission of ECB policy takes time—around nine to 18 months. The gradual pass-through of lower rates is starting to show. That makes us cautiously optimistic for the growth outlook,” says Bastian Freitag, head of fixed income Germany at Rothschild & Co Wealth Management.
We expect growth of around 1.1% for the eurozone, so anemic, sluggish growth—but without additional inflationary pressure.
Oliver Eichmann, DWS
What does the Interest Rate Pause Mean for Bond Markets?
Eurozone sovereign yields remain elevated—with the 10-year Bund yield near 2.68 %—reflecting higher issuance, fiscal concerns and an uncertain growth outlook. Bonds with shorter maturities, which are more responsive to ECB’s rate moves, have been steady but could become volatile if the ECB’s stance shifts. According to DWS’s Eichmann, “there would be sharper price declines in bonds with shorter remaining maturities if the ECB were to signal rate hikes, contrary to our expectations. But since our baseline scenario assumes unchanged central bank rates, we currently see little movement at the short end of the yield curve.”
Chris Iggo, CIO Core Investments at AXA Investment Managers, says that lower financing costs are drawing companies to market, with “many issuers coming to market and spreads tightening.” Investors have responded by rotating into longer-duration bonds and credit, even as expectations for additional ECB cuts remain limited.
When Is the Last ECB Meeting in 2025?
• Dec. 18, 2025
