ECB Chooses Patience as Growth Stabilizes

The European Central Bank kept its policy rate unchanged at 2.00% at the December meeting, opting to maintain current settings as the macro picture shows signs of resilience.

Rather than introducing fresh stimulus, policymakers pointed to improving fundamentals, striking a more even-handed tone than earlier in the year. While risks have not disappeared, the latest communication suggests greater confidence in the Eurozone’s ability to absorb ongoing pressures.

Improving Conditions Support a Gradual Expansion

Updated projections show a slightly firmer growth path across the forecast horizon. Eurozone GDP is now seen expanding by 1.4% in 2025 and 1.2% in 2026, before settling close to 1.4% in the 2027–2028 period. The ECB described this as a slow but steady recovery, limited by improving financial conditions, gradual stabilization in consumer demand, and stronger external trade momentum. Officials also noted that the region has become more resilient to external shocks, even as longer-term structural challenges remain in place.

Inflation Moves Closer to Target, but Not Evenly

On inflation, the outlook has improved modestly. The ECB now expects headline inflation to sit just below the 2% target in both 2026 and 2027, helped by easing energy prices and a normalization in goods inflation. However, service inflation continues to run firm, driven by persistent wage growth and elevated labor costs. Reflecting this imbalance, the ECB introduced a small upward revision to its core inflation outlook over the medium term, signaling that underlying price pressures have not fully faded.

Policy on Hold, Patience in Focus

Against this backdrop, the ECB signaled no urgency to adjust policy. Instead, it appears prepared to keep rates steady for an extended period, allowing previous tightening and improving fundamentals to filter through the economy. While some market participants have begun to discuss the possibility of a rate increase in late 2026 or early 2027, the prevailing view remains that rates will stay anchored around 2.00% unless a material shock alters the outlook.

Source: ECB

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