The European Central Bank kept its benchmark deposit rate unchanged at 2% on Thursday, marking the fourth consecutive meeting where the euro-area’s main policy rate stayed flat.
ECB Decision
Bank President Christine Lagarde announced that the ECB “reconfirmed that we are in a good place” with interest rates, but clarified that this does not mean the bank is static. She added that the rate-setting council will review the situation meeting by meeting, beginning with the next gathering in February, and that there is “no set date for any move.” Lagarde also said, “There are lots of factors that are in play and that will evolve over the course of ’26.”
The deposit rate has held at 2% since the ECB cut it in June. Economists now think the rate could remain there for months – and possibly into 2027 – as the eurozone’s economic fundamentals appear robust enough to manage without lower borrowing costs.
Why the Rates Stayed
The ECB’s decision reflects a delicate balance between persistent inflation and steady, though modest, growth. A recent trade deal with the United States removed uncertainty that had previously restrained business planning. Higher rates are used to fight inflation, while cuts would support growth.
In its decision statement, the ECB said that economic growth “is expected to be stronger” than in its last projections made in September. It also noted that inflation in services businesses was declining more slowly, even as overall inflation was expected to stabilize at the bank’s 2% target.
Growth Outlook and Trade Context
S&P Global’s purchasing-manager surveys slipped slightly for December, yet they still showed business activity expanding as the year ends. The data reinforce expectations that the 20 euro-using countries will continue to see growth of around 0.3 % per quarter over the previous quarter.
This outcome is better than feared during the turbulent trade negotiations with the United States over the summer, which finally settled with a 15 % tariff on European goods imposed by U.S. President Donald Trump. Trump had threatened higher rates, and the deal struck with the European Union’s executive commission appears to have removed uncertainty and made it easier for businesses to make decisions. As a result, analysts say the economy can get by without the added boost from a rate cut.
“The haze of economic uncertainty has somewhat lifted, especially regarding trade,” economist Lorenzo Codogno said.
Inflation Pressures Remain
On top of that, inflationary pressures remain too high for the ECB to contemplate a cut. The headline rate of 2.1 % for annual inflation in November is roughly in line with the bank’s 2 % goal, thanks in part to a drop in volatile energy prices. However, inflation in the services sector was higher at 3.5 %, encompassing a wide range of the economy from hairdressers and hotels to concert tickets and medical services.
Comparison with the Bank of England
While the ECB stood pat, the Bank of England on Thursday cut its key interest rate for the first time in four months as stubbornly high inflation starts to ease. Policymakers voted 5-4 to reduce the base rate by a quarter of a percentage point to 3.75 %. Consumer-price inflation slowed to 3.2 % in the 12 months through November, from 3.6 % a month earlier.
Central-bank rate cuts can support growth by strongly influencing borrowing rates throughout the economy, lowering credit costs and promoting credit-sensitive purchases such as new homes by consumers or new production facilities by businesses. Higher rates have the opposite effect and are used to contain inflation by dampening demand for goods.
Key Takeaways
- The ECB left the 2 % deposit rate unchanged for the fourth meeting in a row.
- Lagarde emphasized that the ECB will review the situation meeting by meeting, with no set date for a move.
- Growth is expected to be stronger than previously projected, while inflation remains near the 2 % target.
- A U.S. trade deal and reduced uncertainty have helped the eurozone economy grow without a rate cut.
- Inflation in the services sector remains above the ECB’s target, keeping the case for a rate hike alive.
The ECB’s decision signals confidence in the eurozone’s economic resilience while keeping policy flexible to respond to evolving trade, inflation, and growth dynamics. As the bank watches developments through 2026, the next policy meeting in February will be closely scrutinized for any change in stance.
