Deutsche Bank’s base case is that the European Central Bank (ECB) will keep interest rates on hold for the whole of 2026 before delivering a hike midway through 2027.
In a research note, published on Wednesday – the day before the ECB’s latest rates decision, it acknowledged, however, there was still the faint possibility of a further rate cut this year.
“But the case for a further easing of monetary policy has not been proven yet,” it says.
In the note, the bank considers three “negative macro surprises” that could shift the ECB off its current holding pattern.
The first involves “further strong FX appreciation”. The current strength of the euro is causing concern among ECB policymakers as it threatens to push inflation below the bank’s 2 per cent target. A stronger euro reduces import prices and erodes the bloc’s export competitiveness.
“Given the change of leadership at the Fed and the potential for a new Fed reaction function, there is a question of what lower US policy rates might mean for the ECB,” Deutsche says.
“If the dollar weakens and euro strengthens, the ECB’s capacity to tolerate FX-based disinflation could be reached.”
Another factor that might prompt a rate cut is a “downside growth surprise”. This might stem from Germany’s fiscal plans proving difficult to implement or from a sudden unwinding of the AI investment glut.
“A scenario that reduces GDP growth by 0.5 per cent spread over two years is the minimum required to think a rate cut is becoming a real risk,” it says.
“However, at the moment, data momentum and surprises are positive, not negative, and GDP trackers are trending upwards, implying accelerating growth,” it says.
A third possibility is what it describes as a “downside inflation surprise”.
“In general, the signal from underlying inflation indicators is consistent with inflation remaining around 2 per cent,” it says.
But a faster-than-expected decline in service price inflation or weaker core goods inflation could prompt a rethink.
Deutsche Bank concludes its note: “The economy is complex. It might not be a single factor like the exchange rate that tips the balance for the ECB to cut again.”
“It might be that several of the above-mentioned forces materialise at the same time,” it says.
