ECB Set To Hold Rates But Debate Over Future Heats Up

The European Central Bank is expected to hold interest rates steady this week for its fourth straight meeting with inflation in check, although debate is heating up about the path forward.

Following a year-long series of cuts, the central bank for the 20 countries that use the euro has kept its key deposit rate on hold at two per cent since July.

Inflation has settled around the central bank’s two-per-cent target in recent months, and Europe has weathered US President Donald Trump’s tariff onslaught better than initially feared.

While sluggish, Europe’s economy has at least proven resilient — third-quarter euro-area growth was this month revised up to 0.3 per cent — and ECB officials have sounded more upbeat.

“The euro-area economy has been much more resilient than could have been expected in the face of the greatest disruption of the international trade order since the Second World War”, ECB governing council member Isabel Schnabel told Bloomberg last week.

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Still, observers don’t believe this will nudge ECB policymakers into action at Thursday’s meeting — uncertainty remains heightened, and Trump’s erratic trade policy as well as potential responses to it are keeping officials on their toes.

“Uncertainty remains higher than usual owing to volatile global trade policies,” ECB President Christine Lagarde said in a December speech to the European Parliament, adding that she saw “two-sided” risks when it came to inflation.

While a stronger euro, cheaper energy, and slowing wage growth would all be expected to hold inflation down, a resilient eurozone economy combined with the German government’s investment bonanza coming online could see price growth pick up pace.

The ECB will publish updated growth and inflation projections that include 2028 for the first time at this week’s meeting, and investors will be closely watching for any clues on the central bank’s thinking regarding future rates.

“Investors will be looking for any further hints that policymakers are getting more optimistic about the outlook,” Capital Economics analyst Andrew Kenningham told AFP, adding that he nevertheless expected eurozone growth and inflation to slow next year.

Schnabel — considered a hawk who is particularly wary of inflation — fuelled expectations of possible rate rises next year after saying last week that she was “rather comfortable” to see traders pencil in hikes, and hinting at rosier projections.

Asked about the growth forecasts last week, Lagarde said she had a “suspicion” they could be revised up.

Still other members of the rate-setting governing council, including Finland’s Olli Rehn and France’s Francois Villeroy de Galhau, have emphasised just how uncertain the inflation outlook is.

“The downside risks on the inflation outlook remain at least as significant as the upside risks,” Villeroy said in a speech earlier this month.

“The name of the game for our future meetings remains full optionality. We don’t exclude any policy action.”

AFP