ECB keeps interest rates steady, raises growth and inflation forecasts

The ECB now sees inflation at 1.9% in 2026, above its previous projection for 1.7% while 2027 inflation is projected at 1.8%, below the 1.9% seen in September

The European Central Bank kept interest rates unchanged as expected on Thursday and raised some of its growth and inflation projections, likely solidifying investor bets that no further rate cuts are coming.

 

The ECB has been on hold since pausing a year-long rate-cutting spree in June and the euro zone's unexpected resilience to global trade strife has gradually taken pressure off the bank to provide more support. 

While the bank kept an option to cut on the table, markets see that as a formality and investors are starting to price in a hike for 2027, even as the US Federal Reserve and the Bank of England continue to lower borrowing costs. 

"Economic growth is expected to be stronger than in the September projections, driven especially by domestic demand," the ECB said in a statement. "The Governing Council is not pre-committing to a particular rate path." Supporting the "hold" narrative, the ECB predicted that inflation would stay around its 2 per cent target for years to come, even if price growth could dip temporarily next year. 

The ECB now sees inflation at 1.9 per cent in 2026, above its previous projection for 1.7 per cent while 2027 inflation is projected at 1.8 per cent, below the 1.9 per cent seen in September. The bank's initial projection for 2028 put price growth at 2.0 per cent at the end of the projection. 

Forecasts for growth, now clearly on a higher path than earlier projected, were also lifted, to 1.4 per cent this year, above the 1.2 per cent projected three months ago. Growth is then seen holding steady in 2026. 

Attention now turns to ECB President Christine Lagarde's 1345 GMT press conference, where investors will be watching to see if she repeats her mantra that policy is in a "good place" or if she signals that a rate cut is now less likely. 

While ECB board member Isabel Schnabel has said the ECB's next move is likely to be a hike, Lagarde is expected to be more cautious given inflation's predicted dip below 2 per cent next year. 

The decline is due to falling energy costs, which the ECB normally looks past, but policymakers will keep an eye on expectations to make sure that a temporary inflation dip is not perpetuated via frugal wage settlements.