ECB to Hold Rates, Outlook Clouded by Strong Euro

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.

ECB policymakers noted that the central bank could afford to be patient, but stressed that this should not be interpreted as hesitancy to act or an asymmetric approach. According to the accounts from the December 2025 meeting, the ECB currently viewed its monetary policy stance as appropriate, though not static. Officials observed that economic activity had proven more resilient than expected, unemployment remained at historically low levels, and the inflation outlook was favorable, with prices projected to stay around target over the forecast horizon. However, the ECB acknowledged that future developments could materially diverge from the current outlook, given the range of potential risks. As a result, monetary policy will be calibrated as conditions evolve, rather than following a predetermined path. The ECB left borrowing costs unchanged for a fourth consecutive meeting in December 2025, with the main refinancing rate remaining at 2.15% and the deposit facility rate holding at 2%.