A projection of a euro sign is pictured on the facade of the headquarters of the European Central Bank (ECB) in Frankfurt am Main, western Germany, December 30, 2025.
Kirill Kudryavtsev | Afp | Getty Images
The European Central Bank kept its key rates unchanged on Thursday. for the fifth consecutive meeting, with its key rate at 2%, in line with the bank’s objective.
The ECB said on Thursday that the inflation trajectory and general economic conditions did not warrant a decision at this month’s meeting, but warned that the outlook was unpredictable.
“Inflation is expected to stabilize at its 2% target over the medium term. The economy remains resilient in a challenging global environment. Low unemployment, strong private sector balance sheets, the gradual rollout of public spending on defense and infrastructure and the favorable effects of past interest rate reductions support growth,” the central bank said. said.
“At the same time, the outlook remains uncertain, particularly due to continued global trade policy uncertainty and geopolitical tensions,” the statement added. THE euro remained stable against the dollar, at $1.179, following this widely anticipated decision.
ECB President Christine Lagarde told a news conference on Thursday that the central bank would maintain its data-dependent and “meeting-by-meeting” approach, and would not “commit in advance to a particular rate trajectory.”
“In particular, our interest rate decisions will be based on our assessment of the inflation outlook and the risks surrounding it,” she said.
Not a “non-event”At first glance, Thursday’s decision looks like a non-event. Economists say no.
“It would be wrong to characterize the February meeting as a non-event. The environment is marked by high uncertainty and bilateral risks,” Deutsche Bank economists said in an emailed study ahead of the rate hold.
“Understanding how the ECB views risks is important for assessing the policy path forward,” they added. increase in the euro exchange rate means of monetary policy when the the inflation rate of the euro zone is already below the ECB’s 2% target, with flash data on Wednesday showing the rate cooled to 1.7% in January.
“Everything else unchanged, the recent appreciation [of the euro] is disinflationary and reinforces the expected inflation sub-target. However, the extent of the impact depends on the circumstances. »
Currency appreciation tends to cause disinflation by making imported goods, raw materials, and energy cheaper, which lowers production costs and consumer prices.
While this may be beneficial for businesses and consumers in the short term, central banks are wary of disinflation, and potentially deflation, in the long term, as it can trigger economic stagnation, with consumers delaying purchases (in the hope that prices will fall further), while businesses may see a decline in revenue and an increase in real debt burdens.
Over the past month, the euro has strengthened 0.75% against the dollar and is up nearly 14% over the past 12 months, amid growing concerns about the unpredictability of U.S. economic policy. Some ECB decision-makers have expressed his concern on the appreciation of the single currency compared to the greenback and its possible depressive effect on the bank’s 2% inflation objective.
“We are closely monitoring this appreciation of the euro and its possible implications in terms of lower inflation,” said the governor of the French central bank, François Villeroy de Galhau. commented last week.
Lagarde said on Thursday that the ECB Governing Council had discussed risks of downward inflation and the euro exchange rate as part of its latest economic risk assessment.
“Inflation could turn out to be lower if tariffs reduce demand for euro zone exports more than expected and if countries with overcapacity further increase their exports to the euro zone,” she noted, adding:
“In addition, a stronger euro could lower inflation beyond current expectations. More volatile and risk-averse financial markets could weigh on demand and thus lower inflation.”
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EUR/USD exchange rate over the last 12 months
Despite the warning signs, Greg Fuzesi, euro zone economist at JPMorgan, said he was not sure whether the currency movements so far would be considered very concerning.
“The ECB is looking at both the level of the currency, the speed of its movement and whether changes are likely to persist, and none of this seems too worrying or clear in the context of an economy that has recently resisted various pressures,” he said in emailed comments.
“Of course, all this can change if growth indicators weaken and/or the currency strengthens much further from there. But that is not the case currently,” he noted.
A next hike?The ECB’s latest decision was in line with consensus forecasts. About 85% of economists interviewed According to the Reuters survey from January, the ECB would leave its rates unchanged until the end of 2026.
Sylvain Broyer, chief EMEA economist at S&P Global Ratings, said on Thursday the central bank could “keep autopilot on this time.”
“FX [foreign exchange] markets remain volatile and distorted by uncertainty, but they nevertheless fulfill their role as shock absorbers. Financing conditions remain favorable and growth continues to exceed expectations,” he said in emailed comments.
The ECB can afford to wait until next month’s updated economic projections to reassess whether its monetary policy is still good, Broyer added.
Deutsche Bank’s base case scenario sees the ECB keeping rates at 2% until 2026, with the next step being a hike in mid-2027. This, they noted in an emailed analysis, would be “driven by fiscal easing, a tight labor market and risks of future inflation exceeding target.”
This year, on the other hand, the risks are moving towards further easing.
“Ultimately, we think domestic inflation will prevail over external disinflation – we see fiscal easing starting to boost activity, but at the same time external risks have increased. Domestic versus external conditions are the key data battle to watch,” they said.