What to expect from interest rates in 2026
According to recent projections, interest rates will gradually decline in North America, but inflationary pressures and the labor market will dictate the pace.
In the United States, the Fed is maintaining a monetary easing cycle. After cutting federal rates in September 2025 to the 4.00%-4.25% range, two additional cuts are expected this year, bringing the rate to around 3.75%-4.00% by the end of December. Forecasts for 2026 indicate only one or two more reductions, with the rate stabilizing near 3.50%. Key factors include a cooling labor market—with unemployment hovering around 4.5%—and inflation approaching the 2% target, but with risks of a spike due to trade tariffs proposed by the incoming administration. The September Summary of Economic Projections projects GDP growth of 2.1%, suggesting volatility in Treasury bonds, with 10-year yields hovering around 4%. This moderation will benefit consumers with more affordable mortgages but could put pressure on fixed-income investors.
In contrast, in Europe, the ECB is taking a more conservative stance. After keeping interest rates at 2% at its October 2025 meeting, the Governing Council anticipates a prolonged pause, possibly until 2027. Headline inflation is estimated at 1.7% for 2026, below the 2% target, driven by a resilient eurozone with GDP growing at 1.5% and a robust labor market. However, external shocks such as the war in Ukraine and trade tensions could force adjustments. The ECB projects that deposit rates will remain at 2% until the end of the year, with minimal cuts if core inflation (excluding energy and food) accelerates to 1.8%. This contrasts with the Fed, reflecting Europe's lower exposure to wage pressures.
Globally, this transatlantic divergence—with lower rates in the US than in Europe—could strengthen the dollar and put pressure on European exports. The IMF anticipates global growth of 3.2% in 2026, with downside risks from protectionist policies. For investors, 2026 offers opportunities in risk assets but requires vigilance against inflationary surprises.
In short, while the Fed is heading towards rates below 3% to stimulate employment, the ECB prioritizes stability, maintaining 2%. This divergence will shape capital flows and bilateral trade, reminding us that in economics, forecasting is as much an art as a science.
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