The market is now fully pricing in an ECB rate cut this Thursday, and Deutsche Bank economists have aligned with that view.
According to them, the combined impact of retaliatory tariffs, ongoing uncertainty, and tighter financial conditions likely exceeds what the ECB had initially anticipated. The earlier assumption by the ECB that tariffs might drive inflation higher is now being called into question.
Recent market developments — including a stronger euro, falling oil prices, and increasing risks of trade diversion — are contributing to a more pronounced downside bias for inflation forecasts.
Despite the expected rate cut, Deutsche Bank expects the ECB to maintain a tone that suggests policy will become “meaningfully less restrictive.” They argue that, with 150 basis points of easing already delivered, policy rates are now nearing neutral territory. Coupled with growing confidence that inflation is moving back toward target, this signals an “implicitly dovish tilt” in the central bank’s policy stance.
Deutsche Bank has provisionally lowered its GDP growth forecast for 2025 to 0.5%, down from its previous estimate of 0.8%, while maintaining its 2026 projection at 1.0%.
The bank also revised its inflation outlook, now expecting headline HICP to average 2.0% in 2025 (previously 2.1%) and 1.7% in 2026 (down from 1.9%).
Looking ahead, Deutsche Bank continues to anticipate a terminal ECB policy rate of 1.5% by the end of 2025. Additional rate cuts are projected for June, September, and December. Although the recent pause in the implementation of higher US reciprocal tariffs has “essentially ruled out” a 50 basis point cut in April, Deutsche Bank maintains that the broader easing trajectory remains intact.
“This is a complex and dynamic shock,” the analysts note, emphasizing that the ECB will need to remain agile and responsive to rapidly evolving economic conditions.