The European Central Bank (ECB) recently revised its inflation forecasts. The FOMC still anticipates to hit its 2% inflation target by later this year. That being said, the central bank expects that it will undershoot this target in 2026 as well. This decision comes on the heels of remarkable developments in the global economy. In this respect, we have observed a corresponding rally in the euro alongside a significant drop in global commodity prices since Liberation Day.
In its September projections, the ECB cut back its staff HICP (Harmonized Index of Consumer Prices) forecasts. This change represents a much more dovish (cautious) view of inflation. The recent strengthening of the euro has contributed to these revisions, allowing the ECB to adjust its expectations for inflation trends. The central bank’s characterization of its own analysis makes clear that it is likely to reach its 2% target imminently. Even longer-term projections suggest trouble under the surface for maintaining that achievement.
As the ECB’s indecision illustrates, no one seems to fully know what they want and where the economy is heading, especially when factoring in the continuing tariff drama. The council will be evaluating these changes in the summer months ahead. Their findings go beyond simply informing the decision-making process around interest rates.
Market participants were counting on an eighth straight interest rate cut prior to Thursday’s meeting. They had already discounted this cut to such an extent into their forecasts. The ECB’s last policy moves suggest that they may cut interest rates as soon as September. Yet other observers think the bank will defer any additional reductions even longer, until October.
Economists are betting that the ECB will only do one more cut this year. They hope to see this shift take place by the end of the year. We know the economic landscape is always shifting. This upcoming cut will likely mark the end of this current interest rate increase cycle.