The European Central Bank is expected to conclude its rate-cutting cycle, with no further cuts anticipated in 2025 and only a slight possibility of a cut in 2026. Inflation is stable at around 2.1%, but growth remains sluggish. Some analysts believe there are upside risks to inflation, potentially leading to a rate hike in 2026.

Money markets are pricing in no rate change for 2026, aligning with the ECB’s message of contained inflation. The current inflation rate stands at 2.1% in the Eurozone, with underlying measures consistent with the ECB’s 2% target. Analysts believe the ECB will maintain rates unless inflation softens significantly.

The outlook for Eurozone growth in 2026 remains modest, with a slight pickup expected due to German fiscal stimulus. Growth projections foresee a rise of 1.1% in 2026, characterized by anemic growth without inflationary pressure. The transmission of ECB cuts is unfolding gradually, impacting the growth outlook.

Eurozone sovereign yields are elevated, reflecting fiscal concerns and uncertain growth. Bonds with shorter maturities could become volatile if the ECB’s stance changes. Companies are taking advantage of lower financing costs, with many issuers coming to market and spreads tightening. Investors are rotating into longer-duration bonds and credit amid limited expectations for additional ECB cuts.

Read more at Morningstar: Is the ECB Done Cutting Rates? What to Expect in December and 2026