We think that the ECB will change its view that interest rates are “in a good place” next year. Growth looks set to remain slow by international standards, and we suspect that it will be weaker than most forecasters anticipate, particularly in Germany. What’s more, both headline and core inflation are likely to fall further below 2% than the ECB expects. As a result, we have pencilled in two more 25bp interest rate cuts for 2026. This would put some downward pressure on government bond yields for most countries – though France’s weak public finances mean that its bond spreads will widen further. Outside the euro-zone, the Swiss National Bank will probably cut its policy rate back into negative territory before long, while Norges Bank’s short monetary loosening cycle is nearly over. By contrast, the Riksbank’s next move is more likely to be a hike.
We'll be discussing the outlook for the euro-zone economy in a 20-minute online Drop-In at 3pm BST on Thursday 2nd October. (Register here.)
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