The European Central Bank is widely expected to leave interest rates unchanged at its meeting this week, marking a fourth consecutive pause as inflation remains broadly under control. While policy itself looks set to stay steady, disagreement is growing beneath the surface over where rates should head next.
After a year of rate reductions, the ECB has held its key deposit rate at 2% since July. Recent inflation readings have hovered close to the Bank’s 2% target, easing immediate pressure for further action. At the same time, the euro zone economy has proven more resilient than many had anticipated, even in the face of renewed global trade tensions.
Economic growth remains modest, though revised figures show the euro-area expanded by 0.3% in the third quarter. That resilience has prompted a more confident tone from some policymakers. Isabel Schnabel, a member of the ECB’s Governing Council, recently noted that the euro-area economy had withstood what she described as the most significant disruption to global trade since the Second World War.
Despite this improved outlook, few expect the ECB to shift policy this week. Uncertainty continues to weigh heavily on decision-making, driven in large part by unpredictable global trade policies and the risk of retaliation measures. ECB President Christine Lagarde has repeatedly stressed that inflation risks remain two-sided, with forces pulling price growth both up and down.
Factors such as a stronger euro, lower energy costs and easing wage pressures could restrain inflation further. However, policymakers also face the possibility that economic resilience, combined with increased public investment, particularly in Germany, may reignite price pressures over time.
The ECB will publish updated economic projections at this meeting, extending forecasts out to 2028 for the first time. These figures will be scrutinised closely by markets for signals on the Bank’s longer-term intentions. Analysts expect policymakers to acknowledge improved near-term conditions while remaining cautious about the medium-term outlook.
Comments from within the Governing Council highlight the growing divide. Schnabel, often viewed as more concerned about inflation risks, has indicated she is comfortable with market expectations that rate increases could return next year. Lagarde has also suggested that growth forecasts may be revised upwards.
Others are more guarded. Policymakers including Finland’s Olli Rehn and France’s François Villeroy de Galhau have warned that inflation risks remain finely balanced. Villeroy has emphasised that downside risks are at least as significant as upside ones, reinforcing the ECB’s commitment to keeping all policy options open.
For now, the ECB appears content to wait. The bigger question is whether holding rates steady reflects genuine confidence that inflation is under control, or whether policymakers are buying time in an environment where the margin for error remains uncomfortably thin.
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