ECB Holds Rates With Growth Firmer And Inflation Near Target

The European Central Bank left interest rates unchanged for a fourth straight meeting as inflation hovers around target and the euro zone weathers global shocks.

The deposit rate was kept at 2% on Thursday — as predicted by all analysts in a Bloomberg survey. Policymakers continued to offer no guidance on future steps, stressing that they’ll act one meeting at a time based on incoming data.

Fresh forecasts accompanied the decision, envisaging firmer economic expansion and inflation returning to 2% in 2028 after staying below that level for most of the next two years.

We reconfirmed that we are in a good place, which does not mean that we are static,” ECB President Christine Lagarde told reporters in Frankfurt. “There was a unanimous decision that was taken today concerning the rates that we decided to hold. But there was also a unanimous view that all optionalities should remain on the table.”

The euro was mostly unchanged at about $1.1740. Bunds initially edged down before paring the move. The 10-year yield was little changed at 2.86%.

Most ECB officials had already signaled that the inflation undershoot requires no immediate action, with analysts in a separate poll suggesting borrowing costs could remain where they are through 2027.

That’s not the case everywhere. The Bank of England cut rates earlier in the day after a similar move last week by the Federal Reserve. Both may loosen further next year.     

Investors, though, have been discounting the chance of further easing globally and have begun betting on a first increase by the ECB as early as 2026.

“The ECB has left rates unchanged and its staff economists have revised up most of their inflation forecasts. That should allow the hawks to remain in control and continue to resist any more rate reductions. Nonetheless, we still view the risks to the outlook are skewed toward further monetary easing next year.”—David Powell and Simona Delle Chiaie. Click here for full REACT

The backdrop to this week’s meeting is an economy that looks sturdier than it has in recent months, having maintained expansion through the worst of the trade strife and even surpassed expectations in the third quarter.

Business surveys published by S&P Global signal steady momentum in the final months of the year, with fiscal stimulus in Germany to help underpin growth beyond that.

Domestic demand will be the main engine of expansion in the years ahead, according to Lagarde.

“Business investment and substantial government spending on infrastructure and defense should increasingly underpin the economy,” she said. “However, the challenging environment for global trade is likely to remain a drag.”

On inflation, officials have signaled they’re ready to accept the prospect of prices advancing at less than their targeted pace for some time. Executive Board member Isabel Schnabel has said she wouldn’t be too concerned as long as such deviations are small.

“Inflation should decline in the near term — mostly because past energy price rises will drop out of the annual rates,” Lagarde said. It “should then return to target in 2028, amid a strong rise in energy inflation.”

With price risks fading and the economy surprising robust, Lithuanian central-bank chief Gediminas Simkus — who’d previously battled to keep the door open to another cut — has said he no longer sees a need to ease further.

A prolonged pause for rates would cap the loosening cycle at eight cuts. That would be welcomed by Schnabel, who thinks the next move — whenever it comes — will probably be a hike.