ECB shows an agile approach to policy

As expected, the European Central Bank (ECB) held policy rates steady during today’s decision, extending its pause for a fifth straight meeting in the current easing cycle. Rates on the deposit facility, main refinancing operations, and the marginal lending facility remain at 2.00%, 2.15%, and 2.40%, respectively.

Economic activity within the bloc remains resilient despite the backdrop of global trade policy uncertainty and elevated geopolitical tensions. Risks also remain broadly balanced as inflation is still expected to reach the ECB’s target. ECB President Christine Lagarde reiterated that both inflation and policy remain in a good place, emphasizing the ECB’s agile approach to policymaking.

Recent economic developments

Growth: Despite headwinds from an uncertain global trade environment and geopolitical risks, economic activity has remained relatively resilient. While the contribution of exports to economic growth has weakened, the softness has been offset by strength in domestic activity, particularly in services and investment. Indeed, both public and private investment have been strong, with the former helped by the gradual rollout of public spending and the latter fueled by the surge in AI-related spending.

Inflation: While inflation declined to 1.7% in January, the ECB continues to expect that inflation overall will stabilize towards its 2% target over the medium term. Moreover, President Lagarde noted that while the upside and downside factors to inflation have continued to shift as the inflation outlook remains more uncertain than usual, the net effect of these risks remains broadly balanced. As a result, inflation—and policy—are still “in a good place.”

Euro: The strength of the euro has remained top of mind for markets, especially amid its appreciation against the U.S. dollar since March 2025. Nevertheless, President Lagarde downplayed its potential impact, noting that movements in the currency have remained roughly in line with its average historic range. Moreover, she reiterated that the ECB does not explicitly target the currency, with any effects of currency movements incorporated into its baseline view of growth and inflation.

Policy outlook

Though headwinds from an uncertain macro environment, together with gyrations in the currency, have all contributed to a more unpredictable outlook than usual, the ECB remains confident that inflation will reach its target by next year. Furthermore, as risks to the outlook remain broadly balanced, President Lagarde reiterated that interest rate policy remains in a “good place.”

The ECB also continues to opt against providing any forward guidance, instead leaning on a data-dependent, meeting-by-meeting approach. Yet, considering elevated uncertainties, the ECB should remain highly agile with a strong focus on optionality. We expect policy rates to remain steady through 2026, with talk of rate hikes likely very premature.

Principal Asset Management