Deutsche Bank cuts ECB terminal rate forecast from 2.25% to 1.50%

Investing.com — Deutsche Bank revised its forecast for the European Central Bank’s (ECB) terminal rate, lowering it from 2.25% to 1.50%, reflecting growing concerns about weaker macroeconomic conditions and inflation risks falling below target. 

The bank’s analysts now project that the ECB policy rate will drop “moderately below neutral by end-2025,” rather than returning to a neutral rate by mid-2025.

The rationale behind the downward revision is twofold. Firstly, Deutsche Bank (ETR:DBKGn) highlights the potential reintroduction of U.S. tariffs under a Trump administration, which could further strain European growth. 

Secondly, weaker underlying macroeconomic performance across the eurozone, coupled with an “emerging threat of below-target inflation,” has contributed to this adjusted outlook. 

“Uncertainty is high on many levels, from the exact impact of US tariffs to the timing of their implementation to how and when Europe responds,” Deutsche Bank noted, underscoring the significant unknowns.

Deutsche Bank emphasized a broad range of potential outcomes, suggesting that “1.00-1.75% to be the main landing zone for the ECB terminal rate” to capture the high degree of uncertainty surrounding European growth, inflation, and monetary policy.

 Four critical factors—fiscal policy, Germany’s economic trajectory, China’s growth, and oil prices—will be essential in determining how the ECB navigates its policy adjustments, says the bank.

This revision indicates Deutsche Bank’s view that Europe may face “more divergent macro conditions relative to the US,” as both regions contend with distinct economic pressures. 

The analysts believe the potential impact of U.S. tariffs on European exports and the region’s subdued inflation outlook could weigh heavily on the ECB’s decision-making in the coming years.