Morgan Stanley Sees Weak Eurozone Growth, Inflation; More ECB Cuts in 2026

10:22 AM EST, 12/29/2025 (MT Newswires) -- The European Central Bank's cutting cycle had a clear target in view, which was reaching neutral, said Morgan Stanley.

The rate cut in June got the ECB there, noted the bank. Communication changed at that meeting, with data dependency and a meeting-by-meeting approach being stressed.

More ECB easing only comes with much weaker data.

Morgan Stanley thinks that such data will arrive in time for the March 2026 policy meeting. Eurozone economic growth is likely to remain weak. Inflation will start to undershoot 2% from January 2026.

Signs of softer wage growth will arrive at the start of the year, bringing a weaker path for core inflation, stated the bank. With headline inflation below target and core inflation set to weaken, the key debate will turn to the factors that could lead to increasing inflation.

Morgan Stanley doesn't think the output gap is closing, paving the way to two further ECB rate cuts.

To sum up, weak growth, paired with some further appreciation of the euro (EUR) is likely to bring two more rate cuts by 25 bps -- March and June 2026 -- according to the bank. From there, improving growth momentum should lead to an end of the rate-cutting cycle, as long as inflation expectations remain firmly anchored at 2%.

The bank anticipates a "mildly" accommodative terminal rate of 1.5% maintained until the end of 2027.

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