Deutsche Bank Lowers ECB Terminal Rate Forecast

Deutsche Bank has revised its forecast for the European Central Bank’s (ECB) terminal rate from 2.25% to 1.50%, citing increasing concerns over weak macroeconomic conditions and the risk of inflation falling below target.

The bank now expects the ECB policy rate to dip moderately below neutral by the end of 2025, instead of returning to a neutral rate by mid-2025.

Rationale for the Downward Revision

Deutsche Bank’s analysts attribute this change to two main factors:
1. Potential U.S. Tariffs: The possibility of reinstating U.S. tariffs under a Trump administration may hinder European growth.
2. Weak Macroeconomic Performance: The overall economic performance in the eurozone is faltering, compounded by concerns over “emerging threats of below-target inflation.”

Deutsche Bank emphasized the high level of uncertainty, stating, “Uncertainty is high on many levels, from the exact impact of US tariffs to the timing of their implementation to how and when Europe responds.”

Potential Outcomes

They forewarned that a 1.00-1.75% range for the ECB terminal rate may be the most plausible scenario due to significant uncertainty surrounding European growth, inflation, and monetary policy.

Critical Factors Influencing ECB Policies

Four essential factors will significantly influence the ECB's policy adjustments:
– Fiscal Policy
– Germany’s Economic Trajectory
– China’s Growth
– Oil Prices

This revision suggests that Deutsche Bank anticipates Europe will experience “more divergent macro conditions relative to the US,” as each region grapples with its unique economic pressures. The bank believes the impact of U.S. tariffs on European exports alongside a subdued inflation outlook could heavily influence the ECB's future decisions.