This is no doubt why the European Central Bank (ECB) has revised sharply upwards its economic outlook. Specifically, it proclaimed an end to interest rate cuts for the foreseeable future. The euro area has been surprisingly resilient in the face of trade policy uncertainty as well as recent economic developments. This comes in the context of a promising EU-US trade agreement and large increased spending plans from Germany. The tack adopted by the ECB now differs widely. It has pulled back from the 25 basis point rate cut that most had expected for September.
Over the summer months, the euro area economy has been remarkably resilient. It’s repeatedly beaten the doomsayers’ forecasts of a slowdown even amid persistent trade worries. In other words, greater uncertainty in the conduct of trade policy weighed heavily on that growth. Some recent changes have made things a bit safer on that front. The EU-US deal has already provided clarity that was sorely needed, easing some of the pressure on the European economy.
The German government presented a supplementary draft federal budget to accelerate public investments. This growth plan commits to a slew of ‘growth booster’ projects in addition to the deal with Europe. Once completed, this proactive approach is predicted to fuel even more economic momentum in the region.
The ECB had already signaled it was done with one last rate cut. They cited as reasons for this decision domestic growth slowing, wage growth softening, and continuing uncertainty in trade policy. The latest economic indicators paint a much more positive picture.
Wage growth in the euro area is unexpectedly decelerating. Recent data from the ECB tracker forecasts that, even taking one-offs into account, it will only get up to 1.7% year-over-year by the end of the first quarter of 2026. Noticing these signs, slowing wage growth is the latest example of broader trends across the labor market. This isn’t sufficient to warrant further rate cuts at this point.
In that context, the most recent inflation report for July showed a further dip in core services inflation to 3.1% y/y. The pace at which core services inflation is increasing is now at the slowest rate since January. It’s quite dismal right now, currently a meager 3.0% (actual three-month/three-month seasonally adjusted annual rate measure). These numbers indicate that the inflationary pressures are likely continuing to recede, lending further justification for the ECB’s decision to hold interest rates steady.
In this context, market participants have adjusted their expectations. They are currently discounting slightly more than 12.5 bps worth of ECB cuts by year end. This shift reflects growing confidence in the stability of the euro area economy and the ECB’s commitment to maintaining its current monetary policy stance.