The eurozone economy has absorbed external shocks with surprising resilience. Growth remains intact. On Thursday, the ECB left its key deposit rate unchanged at 2%, while maintaining its main refinancing rate at 2.15% and the marginal lending facility at 2.40%, in line with market expectations.
Growth Holds Up, Inflation Stays Near Target
The ECB’s decision comes against a backdrop of firmer-than-expected economic data. The central bank now forecasts eurozone output growth of 1.4% in 2025, upgraded from a previous estimate of 1.2%. Growth is projected at 1.2% in 2026, 1.4% in 2027, and 1.4% again in 2028.
That resilience has been extremely noteworthy given the drag from U.S. tariffs. While the levies continue to constrain exports, their economic impact has been less severe than anticipated. Third-quarter growth was revised up to 0.3% this month, beating expectations and reinforcing confidence in the recovery.
Manufacturing remains the eurozone’s weak link, with abysmal indicators in Germany, but strength elsewhere is offsetting the drag. The labour market remains tight, domestic spending has held up, and investment appetite has been supported by rising interest in artificial intelligence and productivity-enhancing technologies. Sentiment indicators suggest this momentum is likely to continue.
Inflation Close to 2%, but Risks Remain Balanced
Inflation was recorded at 2.1% in November and has hovered close to the ECB’s 2% target since early 2025, largely driven by price pressures in the services sector. The ECB’s latest staff projections show headline inflation averaging 2.1% in 2025, 1.9% in 2026, 1.8% in 2027, and 2.0% in 2028.
An EU decision to delay the rollout of a new carbon-pricing system (ETS2) is also expected to keep inflation lower than previously anticipated in 2027.
Still, policymakers remain cautious. The ECB reiterated that it will stick to a “data-dependent and meeting-by-meeting” approach, stressing that policy decisions will be guided by incoming economic information rather than pre-set paths.
“The Governing Council is determined to ensure that inflation stabilises at its 2% target in the medium term,” the ECB said on Thursday.
ECB President Christine Lagarde struck a balanced tone earlier this month, saying: “We are quite close to potential, but there’s a lot to be done in terms of improving productivity in the euro area.”
The 2026 Question: Cut, Hold — or Hike?
While Thursday’s decision was widely expected, investor attention is increasingly shifting to what comes next. Ahead of the meeting, speculation had been growing that the ECB’s next move could be a rate hike in 2026.
Those expectations were fuelled by comments from executive board member Isabel Schnabel, who said in early December that inflationary risks now outweigh the risk of an economic slowdown. She pointed to stronger-than-expected services inflation and wage growth, adding that she is “comfortable” with investor bets that the next policy move could be a hike.
Other policymakers remain more guarded. France’s François Villeroy de Galhau said earlier in December: “The downside risks on the inflation outlook remain at least as significant as the upside risks, and we would not tolerate a lasting undershooting of our inflation target.”
Looking ahead, fiscal policy could complicate the inflation picture. Germany’s planned increase in defence and infrastructure spending, enabled by lifting its debt brake, is expected to provide additional stimulus from 2026, potentially adding to price pressures over time.
Markets React Cautiously
Markets took the decision largely in stride. The euro edged up around 0.03% against the US dollar, trading near $1.3381. The EUR/USD pair remains in a consolidation phase, reflecting uncertainty over the future policy paths of both the ECB and the US Federal Reserve, which cut borrowing costs last week.
From a technical perspective, EUR/USD remains within a broader bullish trend, though short-term price action is range-bound between $1.1470 and $1.1860. A break above $1.1860 could open the door to $1.2270, while a move below $1.1470 would expose support near $1.1230. Momentum indicators show early signs of recovery, though the RSI is approaching overbought territory.
A Central Bank Growing More Confident
The ECB’s decision also comes on the same day the Bank of England cut its key interest rate, highlighting diverging policy paths among major central banks.
For now, Europe’s message is clear: the eurozone has absorbed global trade shocks better than expected, inflation is close to target, and the economy remains resilient, even as policymakers acknowledge that risks are pulling in both directions.
As Lagarde noted, global uncertainty, trade disruptions, and shifting fiscal dynamics could still push prices either higher or lower. But with growth holding up and inflation anchored, the ECB appears comfortable staying on pause, while keeping markets guessing about whether 2026 brings the next cut, or the next hike.
