The European Central Bank left interest rates unchanged on Thursday, in line with expectations, choosing caution as inflation hovers near target but economic and political uncertainties cloud the outlook.
In June, the ECB cut its key deposit rate to 2%, down from a record 4% within just a year, marking the start of an easing cycle. Since then, however, the central bank has opted to pause, with consumer prices now only slightly above its 2% goal following the post-pandemic inflation spike and fallout from Russia’s war in Ukraine.
Markets are now looking closely at the ECB’s new economic projections. Analysts anticipate modest upward revisions to 2025 growth and inflation, though views on the 2026 outlook remain mixed.
Uncertainty looms on several fronts. The European Union’s recent agreement with Washington on 15% tariffs is broadly aligned with the ECB’s base case of 10%, but the real effect on growth will only become clear in the coming months. Meanwhile, the possibility of U.S. regulators tightening scrutiny on European pharmaceutical companies adds another layer of risk.
Political tensions in France also complicate the picture. The eurozone’s second-largest economy saw a new prime minister appointed this week after unpopular austerity measures triggered public backlash, raising concerns about stability.
Should financial markets come under renewed stress, investors may question whether the ECB could step in with its Transmission Protection Instrument, designed to shield vulnerable sovereign debt.
For now, traders assign roughly a 70% chance that one more rate cut could come by next summer, suggesting the door remains open.
“While we still have some sympathy for another, rather preemptive, rate cut to avoid unwarranted euro strengthening and inflation undershooting, we also see a majority at the ECB not sharing this view and instead stressing signs of resilience and recent hard data,” analysts at ING wrote in a note.
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