The market expects an ECB rate cut on Thursday, supported by Deutsche Bank’s economists. The economic impact from tariffs, uncertainty, and tighter financial conditions appears greater than previously anticipated.
Deutsche Bank suggests that inflation risks are skewed downwards due to factors like a stronger euro and lower oil prices. They predict the ECB will describe its stance as “meaningfully less restrictive” following the rate cut.
GDP And Inflation Outlook
The bank has revised its GDP forecast down to 0.5% for 2025 and adjusted inflation outlooks for 2025 and 2026 to 2.0% and 1.7%, respectively. They foresee a terminal rate of 1.5% by the end of 2025, with additional cuts anticipated through the next year.
Analysts note the need for the ECB to adapt to the evolving economic landscape.
What we’re seeing here is the expectation of a shift in monetary policy by the European Central Bank later this week, and there’s strong support for that view from the team at Deutsche Bank. With tighter financial conditions, looming trade barriers, and the wider macroeconomic backdrop seeming tougher than many had previously priced in, the economic drag now looks harder to ignore.
Deutsche’s economists argue that the risks to inflation are now weighted more towards the downside. A firmer euro, which tends to reduce imported inflation, along with consistently weak oil prices, feeds directly into this argument. These cheaper energy costs help businesses manage expenses, and for households it’s a bit of relief—both contributing to slowing inflation.
ECB Policy Expectations And Market Impact
Following the forecast cut, the ECB is expected to soften its communication too, shifting from restrictive language toward something more accommodative. The phrase “meaningfully less restrictive” is what Deutsche anticipates the ECB will adopt. That signals a determined change in tone, suggesting that policymakers may soon treat easing as less of a question and more of a path to continue walking, albeit slowly.
The changes to the bank’s projections—lower growth expected next year, and gently falling inflation through into 2026—align well with this policy direction. A GDP forecast of just half a percent reflects fragile expansion prospects, which is mild by euro area standards. The downward inflation revisions tip the balance even further towards stimulus, especially considering the new terminal interest rate target of 1.5%. That’s quite a move from the current level and implies a steady hand on the cutting path throughout the next year.
What does all this mean as we look ahead? If we are in the markets, we should note the pace of rate cuts priced into various expectations and instruments. Rate-sensitive products are particularly reactive in such environments, especially when policy adjustments arrive alongside credible revisions to macroeconomic forecasts.
Lagarde hasn’t opposed the suggestion of further reductions either—at least not firmly. There’s a consensus building outside the central bank that the fight to contain inflation is turning into a wait-and-see game, where downside misses are becoming more likely than upside surprises. Traders should be attuned to short-end rate products and volatility in those front months, particularly as forward guidance from the July meeting and onwards could quickly reinforce, or walk back, Thursday’s message.
Policy divergence with other central banks, notably the Fed and BoE, will also provide directional cues. Should the ECB press ahead with easing while others hold rates steady or tighten, cross-currency strategies may benefit from widening yield differentials. These spreads are not just theoretical—they impact futures, options, and swap curves, and often shift positioning dynamics fairly rapidly.
The next few sessions may bring choppiness as market participants adjust positions first based on expectation and then based on reaction. If that messaging from the ECB—about being less restrictive—is not backed by detailed forecasts or contingency discussion, we could see risk unwind. On the other hand, clearly projected steps through the end of 2025, with inflation still sliding and growth under pressure, should help cement a calmer path for longer-end products and increase carry confidence.
In terms of practical approach, we might consider re-evaluating options on short-term rate products where volatility premiums remain elevated. Also, watch for increased open interest shifts following the release. That can sometimes tell a clearer story than the press conference alone.
