Markets See Rate-Cut Cycle Ending: Europe’s central banks shift course

Financial markets are increasingly signaling that Europe’s interest-rate cutting cycle is nearing its end. Money markets indicate that the European Central Bank, Sweden’s Riksbank and Norway’s Norges Bank are expected to keep policy rates unchanged at upcoming meetings and remain largely on hold through 2026. This marks a sharp reversal from earlier in the year, when investors anticipated aggressive easing across much of Europe.

The Bank of England stands apart

The UK remains a notable exception to the broader European trend. The Bank of England is expected to cut rates by 25 basis points to 3.75% at its next meeting. Even so, markets are fully pricing in only one additional rate cut next year, despite softer-than-expected inflation data for November. In total, money markets now anticipate around 66 basis points of easing by the end of 2026.

Bond yields and currencies react

The shift in rate expectations is already visible across bond and currency markets. German two-year yields, a benchmark for the euro area, have risen by about 10 basis points this month as investors reassess the ECB outlook and even contemplate renewed tightening. By contrast, equivalent UK yields have declined in December, underscoring the divergence between Britain and its European peers.

Why markets see an end to easing

Market participants argue that much of the easing has already been delivered and that policy rates in many countries are no longer restrictive. Fund managers note that the dominant theme of recent weeks has been the growing expectation that some of the earliest rate cutters could be closer to hiking again than to delivering further cuts.

As International Investment experts report, markets are increasingly confident that the European rate-cut cycle is largely complete, with the UK standing out as a key exception. This divergence reshapes risks for investors, supporting euro-area yields while leaving the pound vulnerable amid expectations of further Bank of England easing.