Monetary policy and interest rates
The monetary policy of the ECB and the Fed is one of the anchors of the scenario. The euro area has on-target inflation and a multi-directional balance of risks – from supply disruptions (global supply chains, extreme weather events, energy prices) to trade tensions and China’s redirection of exports towards the EU. Thus, the ECB has chosen to keep its powder dry and frequently reassess the scenario, maintaining a stable policy while the risks do not tip the economy one way or the other. Our forecasts are based on a depo rate of 2.00% in the coming quarters. This is the same rate as was being priced in by the financial markets until the escalation of the conflict in Iran triggered a shift in sentiment (see first chart).
In the US, the narrative is different, but the result is relatively similar: the gradual cooling of the labour market and the moderation of inflation at the end of 2025 provide room for some additional cuts, although the robustness of growth suggests that the Fed is nearing the end of the rate-cutting cycle. Our forecast scenario foresees two more cuts, bringing the fed funds rate to the range of 3.00%-3.25%, a level that is consistent with more neutral monetary conditions. This assessment is shared by market pricing (see second chart).
Risks
This environment outlines financial conditions with a stability that should not be unfavourable for economic performance. However, the perception of risk continues to manifest episodically in the markets. Geopolitical conflicts remain at the forefront as a source of supply-side disruptions. In early March, oil and gas came under severe stress following attacks involving Iran, the US and Israel, with futures – amid high volatility – pointing to prices for 2026 as a whole significantly higher than those quoted in mid-February. Two additional features stood out: (i) futures prices anticipated some easing over the following quarters, and (ii) they fluctuated with considerable volatility (for oil, futures for 2026 as a whole swung between increases of 10% and 25%, and between 30% and 70% for gas). If the path reflected in these futures persists then the outlook for international economic activity would lose some momentum. However, with the support of the accumulated global energy stocks and anchored inflation expectations, the outlook ought not to suffer any profound change nor will it necessarily substantially alter monetary policy strategies, which are generally starting from neutral or slightly restrictive levels. A scenario with persistently higher energy prices would raise the risk of more significant disruptions, deeper tensions in financial markets and indirect effects on inflation, and could spur a more pronounced hawkish shift in monetary policy. On the other hand, in the risk map, it is important not to overlook the importance of monitoring public debt dynamics in several advanced economies (the United Kingdom, France, Japan, and even the US have experienced some turbulence in their long-term interest rates) nor the financial risks surrounding AI, both in terms of its ability to meet expectations and its potential to disrupt established economic structures, in a context of high valuations and significant stock market concentration (see last chart).
