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Danske Bank: European Central Bank Rate Cuts No Longer Expected in 2027

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Danske Bank Research no longer expects the European Central Bank to reduce its key rates in 2027, reflecting a "more resilient" economic growth in the euro area than previously thought, despite higher corporate costs and consumer prices due to the ongoing conflict in Iran.

The research firm still forecasts a final 25 basis-point rate hike from the ECB at its September 2026 monetary policy meeting, taking the deposit rate to 2.50%. The central bank is then projected to leave the deposit rate unchanged throughout 2027, instead of bringing it down to 2%.

"While stronger growth removes the need for cuts next year, contained underlying inflation limits the need for more than one additional hike. The rise in headline inflation has been confined to a narrow range of energy products, with no signs of spillovers to other goods and services, including food. Wage growth is still easing, wage expectations are unchanged, and there is no evidence of second-round effects," analysts said in a Thursday note. "This likely reflects the relatively balanced starting point of the economy before the conflict in Iran particularly regarding labour market conditions."

"Over the longer term, we expect the deposit rate to fall towards 2.00%, but in 2027 the ECB is likely to keep rates somewhat higher to guard against inflation becoming de-anchored amid the temporary demand boost from AI investment and fiscal policy," the note added.

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