As predicted by many leading economists across the continent, the European Central Bank (ECB) on Friday (December 19) left interest rates unchanged for a fourth straight month, as inflation hovers around the two per cent target while the euro zone weathers global economic shocks.

The ECB held its deposit rate at two per cent yesterday after eight cuts from the four per cent peak, with officials saying the cycle is now “most likely” finished, according to its latest end-of-year outlook.

ECB board officials say the rate can stay at this level unless the economy faces another major shock, noting that any debate about raising rates would be seen as too early. Policymakers continued to offer no guidance on future steps, stressing that they’ll act one meeting at a time based on incoming data.

Fresh forecasts accompanied the decision, envisaging firmer economic expansion and inflation returning to two per cent in 2028 after falling short of that level during the next two years. The updated assessment “reconfirms that inflation should stabilise at the two per cent target in the medium term”.  

Most ECB officials had already signalled that the inflation undershoot requires no immediate actio,n with analysts in a separate poll suggesting borrowing costs could remain where they are through 2027.

European economy looking sturdier

The backdrop to this week’s ECB board meeting is an economy that looks sturdier than it has in recent months, having maintained expansion through the worst of the trade strife and even surpassed expectations in the third quarter.

Business surveys published by S&P Global signal steady momentum in the final months of the year, with fiscal stimulus in Germany to help underpin growth beyond that.

On inflation, officials have signalled they’re ready to accept the prospect of prices growing at less than their targeted pace for some time. Executive board member, Isabel Schnabel, has said she wouldn’t be too concerned as long as such deviations are small. Lithuanian central-bank chief, Gediminas Simkus, who’d previously battled to keep the door open to another cut, has also said he no longer sees a need to ease further due to the economy’s surprising strength.

A prolonged pause for rates would cap the loosening cycle at eight cuts. That would be welcomed by Schnabel, who thinks the next move – whenever it comes – will probably be a hike.