ECB rates but not ‘non-event’, say economists Here’s why

The European Central Bank kept policy rates unchanged on Thursday For the fifth consecutive meeting, with the key interest rate at 2%, in line with the bank’s target.

The ECB commented on Thursday that the path 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 remain stable at its 2% target over the medium term. The economy remains resilient in a challenging global environment. Low unemployment, a solid private sector balance sheet, a gradual rollout of public spending on defense and infrastructure and the supportive effects of previous interest rate cuts are supporting growth,” the central bank said. said.

“At the same time, the outlook is still uncertain, especially given the ongoing global trade policy uncertainty and geopolitical tensions,” it added. The Euro After the widely expected decision, the dollar was flat at $1.179.

ECB President Christine Lagarde said at a press conference on Thursday that the central bank would maintain its data-dependent and “meeting-by-meeting approach” and would not “pre-commit to a specific rate path”.

“In particular, our interest rate decisions will be based on an assessment of the outlook for inflation and the risks surrounding it,” she said.

“Understanding how the ECB is thinking about risks is important to gauge the policy path forward,” he added. The euro exchange rate is increasing This means that for monetary policy when Euro zone inflation rate Already below the ECB’s 2% target, flash data on Wednesday showed the rate had cooled to 1.7% in January.

“All else unchanged, the recent appreciation (of the euro) reinforces the undershoot of expected inflation. However, the magnitude of the impact depends on the situation.”

Currency appreciation tends to destabilize by making imported goods, raw materials and energy cheaper, resulting in lower production costs and consumer prices.

While this is good for businesses and consumers in the short term, central banks are wary of deflation and possible inflation in the long run because it could destabilize the economy as consumers hold back purchases (in anticipation of prices falling further) while businesses experience lower revenues and real debt burdens.

Over the past month, Euro It has strengthened 0.75% against the dollar and is up nearly 14% over the past 12 months, amid growing concerns over uncertainty over US economic policy. Some ECB policymakers have expressed concern The appreciation of the single currency against the greenback and its potential depressing impact on the Bank’s inflation target of 2%.

“We are closely monitoring this rise in the euro and its potential impact on deflation,” said Francois Villeroy de Galhau, governor of France’s central bank. commented last week.

Lagarde said on Thursday that the ECB’s Governing Council had discussed inflation risks and the euro’s exchange rate as part of its latest economic risk assessment.

“Inflation could moderate if euro area export demand declines at a greater rate than expected, and if countries with more capacity increase euro area exports further,” she noted:

“Furthermore, a stronger euro could lower inflation than currently expected. A more volatile and risk-averse financial market could weigh on demand and thus lower inflation as well.”

Despite the red flags, Greg Fuzzi, euro zone economist at JPMorgan, said it was not clear that the currency swap would be seen as too relevant to date.

“The ECB looks at both the level of the currency, the speed of its movement and whether any changes are likely to be sustained, and none of these appear too troubling or obvious in the context of an economy that has recently been resilient to a variety of pressures,” he said in emailed comments.

“Of course, this could all change if growth indicators weaken and/or the currency gets stronger from here. But that’s not the case at the moment,” he noted.

The ECB’s latest decision was in line with consensus estimates. About 85% of economists Survey done Reuters said in its January poll that the ECB would keep rates unchanged for the rest of 2026.

Sylvain Breuer, chief EMEA economist at S&P Global Ratings, commented on Thursday that the central bank “could put it on autopilot at this point.”

“FX (foreign exchange) markets remain volatile and distorted by uncertainty, though they are doing their job as shock absorbers. Financing conditions remain supportive and growth remains above expectations,” he said in emailed comments.

The ECB may wait until next month’s updated economic forecast to see if its monetary policy is still in a good place, Breuer added.

Deutsche Bank’s base-case scenario is for the ECB to hold rates at 2% until 2026, with the next move being a hike in mid-2027. This, he noted in an emailed analysis, “will be driven by financial easing, a tight labor market and future inflation risks moving ahead of target.”

This year, meanwhile, the risk seems to have increased towards further easing.

“Ultimately, we think domestic inflation will outpace external disinflation – we see evidence of monetary easing boosting activity, but at the same time external risks have increased. The key data battle is domestic versus external conditions,” he said.