Background on the European Central Bank (ECB)
The European Central Bank (ECB) is the central bank responsible for monetary policy in the Eurozone, which consists of 19 European Union countries that have adopted the euro as their common currency. The ECB aims to maintain price stability, support the general economic policies of the European Union, and manage the euro’s official currency.
ECB Decision to Keep Interest Rates Unchanged
On Thursday, the ECB decided to keep its key interest rates unchanged. This decision comes after a year-long series of rate cuts that were interrupted in June and the unexpected resilience of the Eurozone to global trade conflicts has lessened pressure on the bank to further support the economy.
Market Expectations and Future Rate Adjustments
Although the ECB has not ruled out further rate cuts, markets view this as a formality. Investors are now considering the possibility of rate hikes as early as 2027, despite the Federal Reserve and Bank of England continuing to reduce borrowing costs.
Revised Forecasts for Growth and Inflation
In a statement, the ECB projected that economic growth would be stronger than previously anticipated in September, driven mainly by domestic demand. The Governing Council has not committed to a specific path for interest rates.
- Inflation Forecasts: The ECB now predicts inflation to be around 1.9% in 2026, up from its previous projection of 1.7%. For 2027, it anticipates inflation to be around 1.8%, down from 1.9% in September. The initial projection for 2028 placed price growth at 2.0% by the end of the forecast period.
- Growth Forecasts: The growth outlook has been revised to a clearly higher path than previously anticipated, with an expected 1.4% growth this year (up from 1.2% three months ago) and stable growth maintained for 2026.
Focus on Christine Lagarde’s Press Conference
Investors will now be attentive to ECB President Christine Lagarde‘s press conference at 13:45 GMT to see if she reiterates her mantra that monetary policy is in a “good place” or hints at a rate cut being less likely now.
While ECB Executive Board member Isabel Schnabel has suggested that the bank may raise rates, Lagarde is expected to be more cautious given the forecast that inflation may fall below 2% next year.
The anticipated decline in inflation is attributed to falling energy costs, which the ECB typically disregards. However, policymakers will monitor expectations to ensure that a temporary drop in inflation due to wage moderation does not persist.
