- At its meeting this week, the ECB is set to stay stable in turbulent times. Despite the stormy news flow, the ECB is in a sweet spot in economic terms, confirming our longer-run outlook of policy rates on hold at 2%, a level the ECB views as broadly neutral. Inflation is near target, growth is close to potential and labor markets remain tight, supporting a prolonged pause consistent with ECB communication, Taylor-rule signals and r* estimates. Quantitative tightening remains the key offset: with QT equivalent to about 3.2% of GDP in annual bond supply, long-term yields stay elevated and counteract the transmission of last year’s easing to the economy.
- Credit is recovering only gradually. Despite 200bps of ECB rate cuts until mid‑2024, credit conditions remain sluggish. Higher long-term rates and elevated uncertainty weigh on firms’ and households’ investment decisions, keeping loan appetite subdued and banks cautious on credit supply.
- Five factors could derail the ECB’s steady stance – with risks tilted to lower policy rates. The main downside risks are a Fed-independence shock that strengthens the euro, a geopolitics-driven confidence shock lowering European investment and consumption, a Ukraine peace deal that sharply lowers energy prices and a rapid AI-led productivity shock that proves disinflationary. The key upside risk to policy rates is a prolonged Middle East escalation that lifts oil prices and inflation forcing a hawkish tilt.
- Eurozone growth outlook resilient, thanks to the German fiscal spending spree and NGEU final mile boost. Eurozone GDP rose by a solid +0.3% q/q (1.3% y/y) in Q4 2025 Momentum was broad-based but Spain continues to be the top performer, while Germany is turning the corner only gradually. Early-year momentum should improve, with support from German fiscal easing and accelerating NGEU disbursements throughout 2026.