A projection of the euro currency sign is shown on the facade of the headquarters of the European Central Bank (ECB) on December 30, 2025 in Frankfurt am Main, West Germany.
Kirill Kudryavtsev Afp | Getty Images
The European Central Bank left policy rates unchanged on Thursday For the fifth meeting, according to the bank’s target, its main interest rate is 2%.
The ECB made clear on Thursday that the trajectory of inflation and broader economic conditions did not warrant a move at this month’s meeting, but warned that the outlook was unpredictable.
“Inflation should stabilize at a target level of 2% in the medium term. The economy remains stable in a challenging global environment. Low unemployment, a stable private sector balance sheet, a gradual increase in government spending on defense and infrastructure, and the supportive effect of past interest rate cuts are supporting growth,” the central bank said. declared.
“At the same time, the outlook remains uncertain due to uncertainty in global trade policy and geopolitical tensions,” he added. The euro After the long-awaited decision, the dollar was flat at $1,179.
It doesn’t seem like a story. Economists say not so.
“It would be an understatement to describe the February meeting as a non-event. The environment is characterized by high uncertainty and bilateral risks,” Deutsche Bank economists said in research emailed ahead of the rate hold.
“Understanding how the ECB thinks about risks is important for assessing the future policy path,” they added the growth of the euro means for monetary policy euro area inflation rate already below the ECB’s 2% target, with Wednesday’s flash data showing the rate cooled to 1.7% in January.
“All else being equal, the recent price increase (of the euro) will reduce inflation and reinforce the decline in expected inflation.” However, the extent of the impact depends on the situation.”
An appreciation of the currency makes imported goods, raw materials and energy cheaper, which in turn leads to lower inflation by lowering production costs and consumer prices.
While this may be good for businesses and consumers in the short term, central banks are wary of lower inflation and possible deflation in the longer term, as this could cause economic stagnation where consumers stop buying (expecting prices to fall further), while businesses could see lower incomes and increased real debt loads.
Last month, euro strengthened 0.75% against the dollar and has risen almost 14% over the past 12 months amid growing concerns about the unpredictability of US economic policy. There are some ECB politicians expressed concern Regarding the strengthening of the single currency against the greenback and its potential downward impact on the bank’s 2% inflation target.
“We are closely monitoring this appreciation of the euro and its potential impact on lower inflation,” said Francois Villeroy de Galhau, head of the French central bank. explained last week.
EUR/USD exchange rate for the last 12 months
Despite the red flags, JP Morgan euro zone economist Greg Fuzesi said it was not clear that currency moves would be too worrisome so far.
“The ECB will be looking at both the level of the currency and the speed at which it moves and whether any changes are likely to be sustained, and none of this seems too worrying or understandable in the context of an economy that has been resilient to various pressures recently,” he said in emailed comments.
“Of course, all of this could change if growth figures weaken and/or the currency strengthens further. But that’s not the case right now,” he said.
Still, he said, the ECB could signal its willingness to respond to shocks if necessary. “There are many issues that the central bank is watching in both directions and uncertainty remains high, especially in geopolitics,” he said.
“However, various uncertainties have narrowed in both directions, and it is not clear that currency movements on their own will significantly reduce them,” he concluded.
The ECB’s latest decision was in line with consensus forecasts. About 85% of economists a survey was conducted In a Reuters poll in January, the ECB said it would keep rates unchanged for the rest of 2026.
Deutsche Bank’s baseline scenario is for the ECB to keep rates at 2% until 2026, with the next move likely in mid-2027. That, they noted in an emailed analysis, was “driven by fiscal easing, a tight labor market and risks of future inflation above target.”
This year, it is aimed at further easing the risks.
“Ultimately, we think domestic inflation will prevail over external inflation – we see evidence that fiscal easing is starting to spur activity, but at the same time external risks have increased. “Internal conditions are the main data battle against external conditions,” they said.