Inflation and Interest Rates

Key Takeaways

• In February 2026, the inflation rate in the eurozone was 1.9%, after 1.7% in January 2026 (Source: Eurostat)
• The ECB raised its inflation forecast for 2026 to 2.6%, with core inflation expected at 2.3%
• In Germany, the current inflation rate is 2.6%, driven by lagged wage-price effects from 2024 and 2025
• The ECB lowered its benchmark interest rates through the end of 2024 in four steps, reducing the various key rates by a total of 1.00 to 1.35 percentage points
• DZ Bank forecasts no further interest rate cuts for 2026 and expects inflation to decline to 1.9%

Volatile Inflation Developments at the Start of the Year

The inflation rate in the eurozone shows volatility in spring 2026. According to Eurostat, the annual inflation rate fell to 1.7% in January 2026 before climbing back to 1.9% in February. This puts the rate just below the European Central Bank's (ECB) target of 2%.

However, a different picture emerges for the full year 2026. The ECB has significantly revised its inflation forecast upwards and now expects an annual rate of 2.6%. The central bank cites changed outlooks due to the current Middle East conflict, which is affecting the economic environment (Source: Raisin, April 2026).

Core inflation, which excludes volatile components such as energy and food, stands at around 2.3%. This figure provides insights into underlying price pressure in the economy and shows that inflation persists beyond commodity markets.

Germany: Wage-Price Spiral Drives Services

Germany's inflation rate stands at 2.6% in April 2026, noticeably above the eurozone average from February. A key driver of this development is the so-called wage-price dynamic. Strong wage increases from 2024 and 2025 are now being reflected with a lag in consumer prices.

Service sectors with high labor content are particularly affected: hairdressers, restaurants, and insurance companies are becoming more expensive than average. These sectors can offset wage cost increases through productivity gains less than, for example, manufacturing, and therefore pass them on more directly to customers.

Monetary Policy Shift After Years of Tightening

The global interest rate environment has reached a holding pattern after turbulent years. Extreme interest rate increases in 2022 and 2023 were followed by gradual monetary easing in 2024 and 2025. The ECB implemented four interest rate cuts through the end of 2024, reducing the various benchmark rates by a total of 1.00 to 1.35 percentage points.

A benchmark rate is the interest rate at which commercial banks can borrow from the central bank. Changes to the benchmark rate influence the entire yield curve in the economy, from savings rates to mortgages to business loans. The ECB uses three different benchmark rates as monetary policy instruments: the main refinancing rate, the deposit facility rate, and the marginal lending facility rate.

Interest Rate Outlook: Pause Rather Than Further Easing

For the current year, analysts largely expect a breather. DZ Bank forecasts no further interest rate cuts for 2026 after a final cut of 0.25 percentage points in December 2025. The reasoning: inflation should decline to 1.9% over the course of the year, reducing monetary policy pressure.

This assessment, however, contrasts with the ECB's raised inflation forecast of 2.6%. The higher forecast limits scope for imminent rate cuts, as the central bank does not want to jeopardize its inflation target. Investors in the DACH region should therefore prepare for a stable interest rate environment that expects neither drastic increases nor further significant cuts.

Diverging Forecasts Complicate Planning

The discrepancy between different inflation forecasts highlights the uncertainty analysts and central banks currently face. While DZ Bank expects a decline to 1.9%, the official ECB projection stands at 2.6%. This range of 0.7 percentage points is substantial and reflects the difficulty in translating geopolitical risks, wage developments, and energy prices into consistent scenarios.

For investors, this means: investment decisions should not be based on single interest rate forecasts, but should consider various scenarios. Fixed-income investments remain attractive with stable rates, while equity investments should benefit from the avoidance of further rate increases. Diversification across asset classes and maturities remains central in this environment.

Historical Context: Normalization After Extraordinary Years

The current situation marks a normalization after the exceptional years of 2022 and 2023. At that time, energy price shocks and supply chain problems drove inflation to record levels, forcing the ECB into the fastest rate hikes in its history. The cuts in 2024 and 2025 represented the logical countermovement once inflation had noticeably eased.

In April 2026, monetary policy is in an observation phase. Inflation is near its target, but not stable enough for a clear all-clear signal. Interest rates are lower than at the peak in 2023 but higher than during the negative rate phase of the 2010s. This middle ground gives the ECB room to cut rates in the event of economic weakness as well as to tighten in case of renewed inflation pressure.

Implications for Savers and Borrowers

Private investors in the DACH region face different consequences. Savers continue to benefit from significantly positive real interest rates compared to the years before 2022. With an inflation rate of around 2% and money market rates in the range of 2.5% to 3.5%, purchasing power is maintained or growing slightly.

Borrowers, on the other hand, must adjust to a persistently higher interest rate environment than in the decade before the pandemic. Mortgage rates in the eurozone are well above the lows of 2020/2021, although they have fallen from the peaks of 2023. Those planning real estate financing should consider longer interest rate lock-ins to protect against possible further increases.

The currency situation between the euro and Swiss franc remains relevant for cross-border investors. The different inflation and interest rate developments in Switzerland compared to the eurozone influence exchange rates and thus the attractiveness of investments in both currency areas.