Our economic outlook for the euro area
October 14, 2025
Window for an additional rate cut appears to have closed
“A lack of softening in recent activity and inflation data closes the window for an additional European Central Bank ’insurance cut.’ We are dropping what would have been the last cut from our forecast and now foresee the policy rate staying at 2% until the end of 2026.”
Shaan Raithatha,
Vanguard Senior Economist
The euro area outlook is shaped by two opposing dynamics. The first is the drag on the economy from higher U.S. tariffs, with the effective rate likely to have increased by around 15 percentage points by the end of 2025. The second is the tailwind from looser fiscal policy, led by Germany’s infrastructure package and greater European Union-wide defense spending.
The inflation outlook remains benign. The European Central Bank (ECB) has achieved a “soft landing.” Inflation and inflation expectations are both tracking close to 2%, and wage growth has moderated materially.
A lack of softening in recent activity and inflation data suggests the window for an additional ECB “insurance cut” has closed. We are dropping what would have been the last cut from our forecast and now foresee the policy rate staying at 2% until the end of 2026. However, risks skew toward an inflation undershoot and additional monetary easing next year.
Euro area economic forecasts
Notes: GDP growth is defined as the annual change in real (inflation-adjusted) GDP in the forecast year compared with the previous year. Unemployment rate is as of December 2025. Core inflation is the year-over-year change in the Harmonized Indexes of Consumer Prices, excluding volatile energy, food, alcohol, and tobacco prices, as of December 2025. Monetary policy is the European Central Bank’s deposit facility rate at year-end.
Source: Vanguard.
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