ECB Expected to Maintain Policy Rates

The European Central Bank said policymakers expected inflation to drop further below their 2% target before the recent surge in energy prices linked to the Middle East conflict. Minutes from the February 4–5 meeting showed officials were comfortable keeping interest rates unchanged and believed the overall outlook was stable, supported by the euro’s strength against the dollar. At the time, inflation was projected to fall below target in the near term, though policymakers warned that volatile energy prices could quickly alter the outlook. That risk has now become more visible after oil prices jumped more than 20% this week, which could push inflation higher in the short run since Europe relies heavily on imported energy. Markets are now pricing in a small chance of a rate hike by December. For now, the bank says its policy stance is appropriate, but it remains ready to adjust if inflation risks intensify.

The ECB left interest rates unchanged at its first policy meeting of 2026, reiterating that inflation is expected to stabilize at its 2% target over the medium term. The interest rate on the main refinancing operations was maintained at 2.15%, while the deposit facility and marginal lending rates were kept at 2.0% and 2.4%, respectively. The ECB said the euro area economy remains resilient, but cautioned that the outlook remains uncertain, particularly due to global trade policy risks and ongoing geopolitical tensions. Speaking at the ECB press conference, President Lagarde reiterated that both the central bank and the euro area inflation outlook are in a “good place.” She warned that inflation figures may move unevenly in the months ahead, but emphasized that policy decisions should not be driven by any single data release. Lagarde also acknowledged that uncertainty around the inflation outlook is higher than normal, reflecting the volatility of the global policy environment.

The European Central Bank is widely expected to keep interest rates unchanged on Thursday, as policymakers weigh the impact of a stronger euro and a wave of low-priced Chinese imports on the inflation outlook. Data released Wednesday showed euro area inflation eased to 1.7% in January, the lowest since September 2024, while core inflation unexpectedly slipped to 2.2%, its lowest level since October 2021. The ECB has held policy steady since June, and markets see little scope for near-term shifts as the eurozone economy shows signs of resilience and inflation remains close to target, with President Christine Lagarde expected to reiterate that policy is in a “good place.” Still, the euro’s recent rally has sparked concern within the Governing Council: Austria’s Martin Kocher warned that further appreciation could push the ECB to resume rate cuts, while France’s François Villeroy de Galhau pointed to the dollar’s recent depreciation as a key factor shaping the bank’s outlook.