Inflation and Interest Rates

The European Central Bank (ECB) left its key interest rates unchanged on March 19, 2026, after taking several steps in preceding months to normalize monetary policy. The decision signals a cautious stance by the monetary authorities, who must navigate between declining inflation and persistent inflation risks.

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Germany's inflation forecasts diverge significantly

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Official forecasts for price developments in Germany present a mixed picture. According to its December projection, the Bundesbank expects an inflation rate of 2.2 percent for 2026, measured by the Harmonized Index of Consumer Prices (HICP). The HICP is a Europe-wide standardized measurement that makes price changes comparable across borders. For 2027 and 2028, the Bundesbank expects further convergence toward its target of around 2.0 percent.

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By contrast, the German Federal Statistical Office (Destatis) forecasts a higher rate of 2.7 percent for March 2026, measured as the change in the national Consumer Price Index (CPI) compared to the same month of the previous year. The discrepancy between the forecasts is partly explained by different measurement methods and reference periods – the Bundesbank considers the annual average, while the Destatis forecast covers a single month.

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Energy prices remain the central uncertainty factor

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Economists rate the inflation risks for 2026 significantly higher than deflation risks. The key driver of this assessment is energy prices, which could remain elevated. In addition, potential sovereign debt problems could increase inflationary pressure. Experts remain uncertain about how severely possible oil price shocks could push inflation upward.

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Should energy prices and inflation remain elevated, interest rate increases could move back into focus according to market observers. Conversely, if prices stabilize, there is much to suggest a continuation of the current course without further monetary tightening.

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ECB pursues stability-oriented monetary policy

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Setting the key interest rate is a high-stakes decision that the ECB makes after careful consideration of its consequences. Analysts expect that the deposit rate – the rate at which commercial banks can park excess liquidity with the ECB – could remain around 2.0 percent through mid-2026, provided inflation sustainably approaches the 2.0 percent target.

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The deposit rate is the ECB's most important policy lever, as it directly affects banks' refinancing costs and thus has a pass-through effect on lending rates for companies and consumers.

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Global influences on interest rate developments

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Monetary policy developments in Europe do not operate in isolation. The Bank of Japan (BoJ) has begun cautiously raising interest rates to 0.75 percent after more than 40 months of inflation above its 2.0 percent target. This exit from decades of negative interest rate policy has global effects on financial markets and international interest rate developments.

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The so-called carry trade – in which investors borrow in low-interest-rate countries and invest in high-interest-rate countries – could lose appeal due to the Japanese rate shift and redirect capital flows.

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Impact on savers and investors in the DACH region

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For savers in Germany, Austria, and Switzerland, the current interest rate environment represents a transition phase. Should key interest rates remain stable or continue to decline, interest rates for savings and fixed deposits will likely come under pressure. Banks typically pass on lower refinancing costs to their customers with a time lag.

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Borrowers, on the other hand, benefit from the ECB's cautious stance. Mortgage rates and business credit rates are unlikely to rise further, provided energy prices do not surge again significantly. The Bundesbank emphasizes in its outlook the importance of stable prices for sustainable economic growth and consumer purchasing power.