MFS: ECB sticking to 2% for the foreseeable future

MFS: ECB sticking to 2% for the foreseeable future

September 12, 2025

Interest Rates ECB

Annalisa Piazza, Fixed Income Portfolio Manager at MFS, comments on the ECB interest rate decision:

'As widely expected, the ECB kept all its key interest rates unchanged at today’s meeting. In terms of the investment conclusion upfront, the fact that growth risks are now balanced, medium-term inflation is at target, and rates are neutral, suggests that the prevailing 2% policy rate does indeed seem to be the terminal rate for this cycle. Consequently, the market can continue to price out any expectation of cuts in the near term, barring any new shocks.

The change in the balance of risks for growth was the key factor behind our revised view that 2% is the bottom of the current easing cycle. Lagarde emphasised the resilience of domestic demand despite the trade war and uncertainties and anticipates further improvement now that some of these factors have lessened. There is also increased confidence that the large fiscal package in Germany will boost the economy, strengthen the labour market, and improve productivity.

However, there is an awareness that the Eurozone still needs to make significant progress in demonstrating cohesion and improving competitiveness, as the global backdrop remains challenging. More structural reforms are necessary to maintain fiscal stability. While this may be somewhat optimistic, it sends a strong message to EU institutions and policymakers.

Markets interpreted Lagarde’s comments as hawkish, further reducing expectations of an additional rate cut in the future. A modest bear-flattening in the Bund curve followed these remarks. Considering stretched positioning, we cannot rule out further modest flattening in the 5-30y segment in the near term, but we suspect that once a rate cut is fully priced out, the steepening of the curve will resume. The balance of risks suggests that curves will remain steep or steepen further in the medium term.

Moreover, the impact of Dutch pension reform and increased spending on defence will continue to weigh on long-dated EGBs. That said, if the economic outlook improves in line with the ECB’s new projections, borrowing requirements may lessen, reducing the risk of supply being a significant catalyst for any overshoot at the long end of the curve. Striking a fine balance, we still anticipate steep curves in 2026.'

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