Deutsche Bank Research Team analyzes the European Central Bank's (ECB) monetary policy outlook, suggesting that the ECB is likely to remain on hold throughout 2026, with the next move expected to be a hike in mid-2027. The report highlights risks of further easing due to potential undershooting of inflation targets and external challenges, including the appreciation of the Euro. The analysis emphasizes the need for significant macroeconomic shifts to prompt a rate cut.

ECB policy outlook and risks

"In our baseline we see the ECB on hold through 2026 and the next move being a hike in mid-2027. The risk in 2026 has always been skewed to further easing given the expected undershoot of the inflation target. Recent events, like the appreciation of the euro exchange rate, underline this risk."

"The path of monetary policy in 2026 will depend on who wins the contest between external conditions and internal conditions. Our baseline assumes that domestic resilience will dominate and that leads to hikes in 2027."

"For the ECB to cut rates again it needs to expect a sufficient deviation from the inflation target: a large enough and persistent enough undershoot of the 2% target. Headline inflation undershoots the target later in 2026 and into 2027 - less than and later than previously assumed."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)