Brokers from Fletrade are closely watching a shift in euro zone interest rate expectations, as investors increasingly adopt a “higher for longer” stance toward the European Central Bank’s (ECB) policy path.
The prevailing sentiment in financial markets suggests that, while a small rate cut in March remains a possibility, the broader trajectory for borrowing costs will see them staying near or even above the 2% mark for years to come.
“This marks a decisive shift from the rate-cut-heavy narratives seen earlier in the year,” one senior broker remarked. “Markets are recalibrating to the idea that the ECB is done easing for now, and may even need to tighten again if inflation risks pick up.”
Markets Downplay Tariff Shock, Eye German Fiscal Boost
Several market-based indicators suggest investors are less concerned about deflationary fallout from tariffs following the recent U.S.-EU trade agreement. In fact, confidence is growing that Germany’s sharp increase in fiscal spending, the largest overhaul in decades, will help stimulate growth, reducing pressure on the ECB to provide further monetary support.
This sentiment has been echoed by major investment banks, including Goldman Sachs, which recently revised its outlook to suggest the ECB’s current easing cycle is effectively over.
While trade risks remain a wild card that could weigh on economic performance, analysts point to the ECB’s own optimism in its latest policy meeting. The central bank presented an upbeat view of eurozone growth, signaling it is in no rush to lower borrowing costs further.
Still, markets remain cautious. Pricing patterns reflect a modest risk of renewed deflationary pressure in early 2026 if tariff negotiations falter, leading to an implied rate cut in March.
Euro Rallies as Fed Seen Cutting
The euro has surged nearly 3% this month, buoyed by expectations that the U.S. Federal Reserve will resume cutting interest rates in September, even as the ECB keeps policy steady.
“This currency move is a direct reflection of divergent policy expectations,” explained one currency strategist. “If the Fed shifts into easing mode while the ECB holds firm, euro strength is almost inevitable in the short term.”
The “higher for longer” narrative, last dominant in 2022 and 2023 during the inflation fight post-COVID and amid geopolitical shocks, appears to be making a firm comeback in eurozone markets.
Key Indicators Point to Rates Above 2%
One closely watched metric is the forward contract on the ECB’s official overnight benchmark, the euro short-term rate (ESTR). Current pricing implies roughly a 60% chance of a 25 basis point cut by March, with the deposit rate settling near 1.92% by December 2026.
A global head of macro research at ING told clients that inflation could temporarily undershoot targets due to economic softness and political uncertainty. However, his longer-term view is that inflation will stay structurally above 2%, driven by sustained fiscal spending and the higher costs from supply chain restructuring.
In such a scenario, policy rates could hit the upper bound of the ECB’s “neutral” range estimated at 1.75% to 2.25% and potentially move into tightening territory if inflation accelerates.
Five-Year Swaps Support Neutral-to-Tight Outlook
The euro five-year ESTR overnight index swap (OIS), often viewed as a barometer of medium-term monetary policy expectations, remains firmly above 2%. After peaking at 2.406% in March when Germany unveiled its fiscal expansion plans, it has settled around 2.12%, staying over the 2% threshold for six consecutive weeks.
A senior rates strategist at Rabobank offered a cautious perspective, noting that while their house view is slightly more pessimistic on growth and more concerned about inflation, they see “literally no change for the deposit rate out till the end of 2027.”
Euribor Curve Signals Mild Uptick into 2027
The Euro Interbank Offered Rate (Euribor), which captures interbank lending costs including some credit risk, is mirroring the ESTR forward curve. Projections show a modest dip in rates by March before a climb back above 2% through 2027.
The head of developed markets economics at BNP Paribas expects the ECB’s next move could actually be a rate hike in late 2026. He frames this as a recalibration within the neutral range, as the balance of risks shifts away from tariff-related drag toward a stronger fiscal-driven growth outlook.
Takeaway
From Fletrade’s perspective, the market is undergoing a strategic reorientation. The expectation of a March cut now looks more like a short-term insurance policy against potential shocks rather than the start of a renewed easing cycle.
“This is a very different environment compared to the ultra-low interest rate era after 2014,” noted one fixed-income specialist. “Both investors and policymakers are now adjusting to a new landscape where 2% is no longer considered high, but rather the new normal.”
If inflation proves sticky and fiscal stimulus sustains momentum, “higher for longer” could shift from a market narrative to a monetary reality shaping investment strategies well into the second half of the decade.
