Monetary policy divergence

Since our latest forecast, upward pressure on global interest rates has eased across the board. This move is partly due to a deterioration in risk appetite in the markets stemming from concerns about AI-related disruptions and more clarity regarding fiscal policy prospects in Japan. Although growth remains solid in the euro area, underlying concerns about too low inflation persist, which has pushed short-end Danish and European rates slightly lower. Across the Atlantic, reduced political uncertainty, a broad rollback of several political measures, including measures related to tariff increases, and clarity regarding a new Fed president have lowered term premia. Combined with weak signals on wage growth, this has exerted downward pressure on US rates.

Fed on hold for now, but further rate cuts expected

The US labour market continues to soften, although at a more gradual pace than previously, reducing the need for imminent rate cuts by the Fed. However, we particularly note that the wage sum is currently almost entirely driven by wage growth. This indicates downward pressure on private consumption but potentially also inflation in the coming months. We expect two additional rate cuts of 0.25 percentage points in June and September, slightly later than previously anticipated and somewhat less than markets expect. Kevin Warsh is likely to become the next Fed Governor, which the markets have welcomed, easing concerns about the central bank's independence.

Solid growth but weak inflation in the Euro area

Recent economic indicators in the euro area have been mixed. Positive growth momentum continues, supported by a rise in private consumption, which ended last year on a strong note. However, credit conditions have tightened, and the services sector appears to be under increased pressure after being a key driver of the economy in recent years. Inflation has been to the soft side, and momentum has recently declined, particularly in the services sector. Although Governing Council members continue to state that the ECB is "in a good place", we believe softer inflation could pave the way for more dovish signals from the ECB in the coming months. Our base case remains that the key rate will stay at 2% throughout 2026 and 2027. The biggest risk of another rate cut would arise if inflationary pressures continued to ease. However, we also see a risk of a rate hike in 2027 if the expansive German fiscal policy and European defence spending have a stronger impact than anticipated.

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