Our economic outlook for the euro area
September 11, 2025
ECB to cut only once more this cycle, if at all
“The European Central Bank held its deposit facility rate steady at 2% at its September meeting. We expect it to cut once more in this cycle, although with inflation at target and recent guidance signaling a higher bar for easing, the likelihood of no further cuts is increasing.”
Josefina Rodriguez,
Vanguard Economist
We continue to expect euro area growth to remain slightly below trend, tracking around 1% in both 2025 and 2026. GDP grew by 0.1% in the second quarter, having increased by 0.6% in the first quarter with the supportive effects of tariff frontrunning. Softer global activity, elevated policy uncertainty, and higher tariffs are likely to weigh on demand in the second half of the year.
Following the European Union’s recent trade agreement with the United States, the effective tariff rate on E.U. exports is set to rise from the current level of 13% to a range of 15%–17% by year-end. We expect Germany’s fiscal package and increased E.U.-wide defense spending to support growth from 2026 onward.
Inflation continues to hover around 2%, with services inflation dropping to its lowest reading since early 2022. We expect headline and core inflation to end 2026 below 2%. The European Central Bank (ECB) held its deposit facility rate steady at 2% at its September 11 meeting. We forecast just one more rate cut in this cycle, which would leave the policy rate at 1.75% at year-end.
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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