ECB Holds Rates Steady as Uncertainty Weighs on Outlook
The European Central Bank (ECB) decided on Thursday to keep interest rates unchanged, a move that was widely expected, as inflation remains close to its target. However, concerns over economic growth and political instability mean that further rate cuts remain possible.
In June, the ECB lowered its key deposit rate to 2% from a record 4% within a year, but has since paused its easing cycle. Inflation now stands only slightly above the bank’s 2% goal after the price surge triggered by the COVID-19 pandemic and Russia’s invasion of Ukraine. Updated projections show a similar inflation outlook to June’s forecast.
The ECB now expects headline inflation to average 2.1% in 2025, 1.7% in 2026, and 1.9% in 2027. Excluding food and energy, core inflation is projected at 2.4% in 2025, 1.9% in 2026, and 1.8% in 2027. Growth is forecast at 1.2% in 2025 (up from 0.9% in June), 1.0% in 2026, and 1.3% in 2027.
President Christine Lagarde stressed that future policy decisions will remain data-dependent and reviewed on a meeting-by-meeting basis, taking into account inflation risks, incoming economic data, and monetary policy transmission. She emphasized that the ECB is not committing to a fixed rate path.
Uncertainty continues to cloud the eurozone outlook. A 15% tariff deal with the Trump administration is slightly higher than the ECB’s baseline 10% assumption, while the full impact on the economy is still unclear. Additional risks include U.S. scrutiny of European pharmaceutical companies and ongoing political turmoil in France, where unpopular austerity measures led to a new prime minister earlier this week.
If market stress intensifies, analysts suggest the ECB may resort to bond purchases through its Transmission Protection Instrument to support vulnerable eurozone economies. For now, traders price in around a 70% chance of one more rate cut by next summer, though policymakers remain divided. ING analysts noted that while a preemptive cut could help avoid euro strengthening and inflation undershooting, most ECB members currently point to signs of resilience in the economy.
