ECB holds interest rates at 2%
Unlock the Editor’s Digest for free Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter. The European Central Bank has left its benchmark interest rate unchanged at 2 per cent for the fourth meeting in a row but raised its growth forecast for the Eurozone. Thursday’s rate decision was in…
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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The European Central Bank has left its benchmark interest rate unchanged at 2 per cent for the fourth meeting in a row but raised its growth forecast for the Eurozone.
Thursday’s rate decision was in line with economists’ expectations.
In its second upgrade since March 2024, the ECB now expects 1.4 per cent growth in the Eurozone this year, compared with its last forecast in September of 1.2 per cent. The bank’s staff also raised their 2026 GDP forecast to 1.2 per cent, up from 1 per cent in September. In 2027 and 2028, growth is expected to improve to 1.4 per cent.
Thursday’s upgrades came after ECB president Christine Lagarde said last week that the Eurozone was “resisting better than what we had anticipated back in April”, when Trump launched his tariffs blitz.
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 months in a row.
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 higher inflation next year is that elevated price increases in services will come down “more slowly”, the central bank said.
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, currently standing at 3.5 per cent.
The euro was little changed immediately after the decision, down 0.1 per cent against the dollar on the day at $1.173.
The ECB’s previous rate cuts, which began in June 2024, have pushed borrowing costs to their lowest level since December 2022.
Swaps traders held on to their bets that the ECB has ended its rate-cutting cycle, with a small chance that the central bank could lift its benchmark rate by the end of 2026, according to derivative prices.
“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.
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”.
