ECB keeps rates unchanged even as choppy markets threaten its 'good place'

[FRANKFURT] The European Central Bank left interest rates unchanged as expected on Thursday (Feb 5) and offered no clues about its next move, reinforcing market bets that policy will remain steady for some time as the bloc enjoys steady growth and near-target inflation.

The deposit rate was left at 2 per cent on Thursday – as predicted by all economists in a Bloomberg survey.

The eurozone’s central bank has been on hold since ending a year-long run of rate cuts in June, and surprisingly resilient growth coupled with easing price pressures have taken nearly all pressure off policymakers to provide any further support.

Some are calling the current benign environment a central banker’s nirvana, suggesting that even a debate about adjusting policy is unlikely in the near term.

“The economy remains resilient in a challenging global environment,” the ECB said in a statement. “At the same time, the outlook is still uncertain, owing particularly to ongoing global trade policy uncertainty and geopolitical tensions.”

ECB President Christine Lagarde said that while the region’s fiscal boost could fuel quicker-than-anticipated growth, challenges remain.

“The euro area continues to face a volatile global policy environment,” she said. “Further frictions in international trade could disrupt supply chains, reduce exports and weaken consumption and investment.”

The ECB added that its updated assessment reconfirms that inflation should stabilise at its 2 per cent target in the medium term.

“The Governing Council is determined to ensure that inflation stabilises at its 2 per cent target in the medium term,” the ECB added. “It will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance.”

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A strong euro relative to the dollar lowers import costs, especially for energy, and curbs inflation at a time when it is already below target, albeit temporarily.

Inflation, the ECB’s primary focus, slipped to 1.7 per cent across the eurozone last month on lower energy costs, and could dip further before a forecast rebound next year, stirring memories of the ECB’s struggle to rekindle price growth for the decade before the Covid pandemic.

But the dollar’s move is not a deal-breaker for now and Lagarde is likely to repeat the ECB’s long-standing line that the exchange rate is merely one factor guiding the inflation outlook and not something the ECB has a target for.

With the dollar dip unwinding in recent days, the euro is actually weaker on a trade-weighted basis than at the ECB’s December meeting, reinforcing market and economist expectations for no interest rate changes in 2026, followed by some policy tightening later in 2027.

If anything, longer-term inflation expectations have been inching up, not down, on solid activity data and energy price rises.

The eurozone has proven surprisingly resilient to trade strife as domestic consumption seems to be taking up the slack created by weak exports and poor industrial production.

Given exceptionally high domestic savings and a strong labour market, economists expect consumption to keep the bloc growing, with the German government’s planned fiscal splurge on defence and infrastructure a further push to expansion.

“The path of monetary policy in 2026 will depend on who wins the contest between external conditions and internal conditions,” Deutsche Bank said in an analysis. “Our baseline assumes that domestic resilience will dominate and that leads to (interest rate) hikes in 2027.”

Risks could still go the other way, however, and if inflation is below target long enough to drag expectations below 2 per cent, policymakers may have no choice but to provide more support. REUTERS, BLOOMBERG