European Central Bank President Christine Lagarde used a Frankfurt speech Thursday morning to signal patience on additional rate cuts, hours after the Eurozone Q1 2026 flash GDP printed at +0.4% quarter-on-quarter — double the consensus +0.2% and the strongest single-quarter growth since Q1 2022. Year-on-year growth measured 1.6%, the highest since Q3 2022.
Lagarde told the Frankfurt European Banking Congress that "the disinflation process is continuing as expected, but the resilience of services inflation and second-round effects from energy combined with stronger growth momentum support a patient approach to further easing." The remarks were interpreted by money markets as steering away from a May 8 cut: overnight-index swap probability of a 25 basis-point cut on May 8 fell to 12% from 41% earlier this week.
Country Detail Surprises
The Q1 GDP composition was notable for the breadth of strength. Germany, the long-time underperformer, printed +0.5% quarter-on-quarter — the strongest quarter since 2021, driven by accelerated auto and chemicals export demand from Asia. France grew +0.3%, Italy +0.4%, and Spain +0.7% — Spain remaining the Eurozone's growth engine for the eighth consecutive quarter. The Netherlands surprised with +0.6% on AI-related semiconductor exports.
A simultaneous flash April harmonized index of consumer prices (HICP) showed Eurozone inflation at 2.4% year-on-year, in line with consensus, while core HICP eased to 2.6% from 2.7%. Services inflation — the ECB's key sticky-services metric — remained at 3.8%, the same level as in March, supporting Lagarde's caution. The Eurozone unemployment rate held at the record-low 6.3%.
Market Reaction
EUR/USD spot strengthened to 1.0780 from 1.0725 at the start of European trade, the strongest since early March. Bund yields rose four basis points across the curve: the 10-year German Bund settled at 2.62%. Italian-German 10-year spreads widened to 124 basis points from 119. The Stoxx Europe 600 traded up 0.6% on the morning, with banks (+1.9%), industrials (+0.8%) and chemicals (+1.1%) leading the rally. The Euro Stoxx Banks Index gapped 2.4% higher on the cross-current of UBS/DB earnings and the GDP surprise.
Outlook
Goldman Sachs European economist Sven Jari Stehn pushed back his ECB cut forecast: now flagging October instead of July as the next cut probability. ABN AMRO's Aline Schuiling reiterated her year-end deposit-rate forecast at 1.75%. The May 8 ECB monetary policy meeting and accompanying staff projections release are the next near-term catalysts. The May 14 European Commission spring economic forecast and the May 23 Eurozone composite PMI release are the next macro-data prints to monitor.