ECB holds rates with growth firmer and inflation near target

ECB president Christine Lagarde: 'We reconfirmed that we are in a good place, which does not mean that we are static.'

Thu, 18 Dec, 2025 - 15:49

The European Central Bank (ECB) left interest rates unchanged for a fourth straight meeting, as inflation hovers around target and the euro zone weathers global shocks.

The deposit rate was kept at 2%, as predicted by all analysts in a Bloomberg survey. Policymakers continued to offer no guidance on future steps, stressing that they will act one meeting at a time based on incoming data.

Fresh forecasts accompanied the decision, envisaging firmer economic expansion and inflation returning to 2% in 2028, after falling short of that level during the next two years.

“We reconfirmed that we are in a good place, which does not mean that we are static,” ECB president Christine Lagarde told reporters in Frankfurt.

“There was a unanimous decision that was taken today concerning the rates that we decided to hold. But there was also a unanimous view that all options should remain on the table.”

The euro erased an earlier drop to trade about $1.1733. Bonds edged down, with the 10-year yield one basis point higher at 2.87%.

Inflation

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

That’s not the case everywhere. The Bank of England cut rates earlier in the day after a similar move last week by the US Federal Reserve. Both may loosen further next year.

Investors, though, have been discounting the chance of further easing globally and have begun betting on a first increase by the ECB as early as 2026.

EU economy

The backdrop to this week’s 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.

Domestic demand will be the main engine of expansion in the years ahead, according to Ms Lagarde.

“Business investment and substantial government spending on infrastructure and defence should increasingly underpin the economy,” she said. “However, the challenging environment for global trade is likely to remain a drag.”

On inflation, officials have signalled they are ready to accept the prospect of prices advancing at less than their targeted pace for some time.

“Inflation should decline in the near term — mostly because past energy price rises will drop out of the annual rates,” Ms Lagarde said, adding it “should then return to target in 2028, amid a strong rise in energy inflation”.