ECB holds rates - The end of the easing cycle maybe?

As expected, the European Central Bank (ECB) kept its policy rates steady today, the second consecutive meeting without rate action. The interest rates on the main refinancing operations, the marginal lending facility, and the deposit facility were each kept unchanged at 2.15%, 2.40% and 2.00%, respectively.

ECB President Lagarde struck a balanced tone, offsetting downgrades to the new staff forecasts with more positive comments about the labor market outlook and reiterating that the central bank is in a very good place to respond to the evolving economic developments.

Recent developments and new forecasts

In recent weeks, markets have become increasingly confident that the ECB’s easing cycle has ended. Although U.S. import tariffs were eventually set at a higher level than the ECB had initially expected (15% versus 10%), the clearing up of tariff uncertainty should reduce the drag on economic growth. In addition, incoming economic data has been generally robust, with the PMI surveys surprising to the upside and labor market data continuing to improve. Headline inflation is only slightly above the 2% target and in line with ECB expectations. In all, the need for additional ECB rate cuts has diminished.

New forecasts

Despite growing market confidence that the easing cycle is over, the new ECB staff forecasts were somewhat downgraded. GDP growth in 2026 is expected to be slightly weaker than previously forecast—a stark contrast to recent upgrades to the 2026 consensus forecast—while the 2027 inflation forecast was downwardly revised to undershoot the 2% target.

During the press conference, President Lagarde noted that the downward revisions to inflation were driven in part by the euro’s appreciation. At the same time, the lower GDP growth forecast for next year likely reflects the larger headwinds from U.S. import tariffs. She revealed very little about the future path of rates, repeating that the ECB is in “a good place,” so it can afford to be data dependent and take a meeting-by-meeting approach.

Future policy

The ECB has successfully navigated a soft landing for this year. Unlike in the U.S., inflation fears in the Euro area are subdued, and the labor market is proving to be a source of strength, which should support consumer spending next year.

Yet, with the U.S. import tariff hit only just starting to be felt, U.S. economic headwinds beginning to emerge, and uncertainty surrounding both the timing and magnitude of Germany’s fiscal spending, the ECB faces a murky outlook. Adding to the challenge, France’s political and fiscal strains could further complicate the policy environment.

Against this backdrop, and with inflation already expected to undershoot the 2% target over the forecast horizon, the door to further rate cuts should not be closed just yet. While the ECB is likely to stay on pause for now, there remains the potential for another rate cut further down the line.

Principal Asset Management