The European Central Bank (ECB) left interest rates unchanged for a fourth straight meeting, amid ongoing global economic uncertainty.
The ECB’s governing council kept its main interest rate at 2 per cent once more, the bank said in a statement. That was in line with economists’ expectations.
Notably the ECB improved its economic forecasts, driven by domestic demand. Growth for the euro zone as a whole has been revised up to 1.4 per cent in 2025, 1.2 per cent in 2026 and 1.4 per cent in 2027 and is expected to remain at 1.4 per cent in 2028, it said in a statement.
ECB president Christine Lagarde said there had not been any discussion among rate-setters of either rate rises or cuts. There had also been unanimity that “all options should remain on the table”.
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As recently as last June, the ECB expected growth this year to come in at just 0.9 per cent. In September, the bank raised its forecast for 2025 to 1.2 per cent in what was the first upward revision to growth projections since March 2024.
At that time, it trimmed next year’s projection from 1.1 per cent to 1 per cent on the back of falling global demand linked to greater trade protection. However, it clearly is now more sanguine about those risks.
The forecasts are seen as an indicator of what the ECB’s next move on interest rates will be.
“The economy has been resilient,” Lagarde told journalists after the decision, pointing to stronger consumption, investment and exports in the third quarter despite US President Donald Trump’s tariffs blitz. Domestic demand was likely to be the “main engine of growth in the years ahead”, she said.
Annual inflation in the Eurozone, which was unchanged at 2.1 per cent in November, has been within touching distance of the ECB’s medium-term 2 per cent target for nine consecutive months.
For 2026, the ECB is now expecting annual inflation of 1.9 per cent, compared with the 1.7 per cent it predicted previously. The key reason for the higher inflation forecast for next year was that elevated price increases in services would come down “more slowly”, the central bank said.
Lagarde warned that the inflation outlook was “more uncertain than usual” due to the vagaries of the “volatile international environment”.
Service price inflation has been well above the ECB’s overall 2 per cent target for the past four years and accelerated again after the summer. At present, it stands at 3.5 per cent. Lagarde told journalists that the ECB was “surprised” by the rises in service prices and discussed the matter “quite a bit” during Thursday’s meeting. She said that the recent uptick was driven by unexpected increases in wages. For now, the ECB was forecasting that this trend would slow down “slightly” next year, she added.
“There is no reason for the ECB to change its policy stance any time soon; neither to the upside nor downside,” said Carsten Brzeski, ING’s global head of macro research.
The ECB’s previous rate cuts, which began in June 2024, have pushed borrowing costs to their lowest level since December 2022.
The euro was flat against the dollar by late afternoon trading at $1.174.
Based on the updated inflation forecasts, Karsten Junius, chief economist at J Safra Sarasin, said that the ECB considered its current stance “as appropriate” and “doesn’t intend to make another insurance rate cut anytime soon”. – Additional reporting: FT
