European Central Bank Keeps Interest Rates Steady; Inflation Expected to Stabilize

The European Central Bank (ECB) has kept its three key interest rates unchanged while assessing inflation to stabilize it at its target of 2 percent over the medium term, the bank said in a Dec. 18 statement.

“The interest rates on the deposit facility, the main refinancing operations and the marginal lending facility will remain unchanged at 2.00 percent, 2.15 percent and 2.40 percent respectively,” the ECB said.

The bank projects inflation to average 2.1 percent this year, slowing down to 1.9 percent in 2026. When food and energy are excluded, inflation is expected to average 2.4 percent in 2025 and 2.2 percent next year.

Inflation numbers were revised up for 2026 mainly because of expectations that inflation in the services industry would decline more slowly, the central bank said.

“The Governing Council’s interest rate decisions will be based on its assessment of the inflation outlook and the risks surrounding it, in light of the incoming economic and financial data, as well as the dynamics of underlying inflation and the strength of monetary policy transmission,” the ECB said. “The Governing Council is not pre-committing to a particular rate path.”

As for economic activity in the eurozone region, the ECB expects gross domestic product growth to be stronger than its September projections, driven especially by domestic demand.

The ECB revised up the projected growth rate to 1.4 percent in 2025 and 1.2 percent in 2026.

The last time the ECB cut rates was in June.

“Keeping interest rates unchanged for more than half a year now sends a strong signal that it would need a severe downward shift in inflation and growth (expectations) to get the central bank into cutting mode again,” ING Bank said in a Dec. 18 post.

“Generally speaking, with inflation expected at or slightly below 2 percent, as well as growth expected at around potential, there is no reason for the central bank to change its policy stance any time soon, either to the upside or downside.”

The ECB’s upwardly revised growth estimates come as eurozone business activity is projected to rise in December, according to a Dec. 16 statement from S&P Global.

The seasonally adjusted HCOB Flash Eurozone Composite PMI Output Index was at 51.9 in December. The flash figure is an advanced estimate of December data compared with the final one, which will be published in January.

Although the December figure is lower than the reading of 52.8 in November, any value above 50 signals an expansion in business activity.

Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said economic growth slowed down at the end of the year because of a slight contraction in the manufacturing sector, with the service sector showing weakening momentum.

“Despite a softening of growth, the service sector continues to look relatively robust,” Rubia said in a statement. “Companies have no reason to complain about new business and are therefore hiring additional staff. Looking ahead, however, companies have become somewhat more cautious, which is likely due in part to the decline in order backlogs.”

“We expect the service sector to continue to play a stabilising role for the economy as a whole in the coming year,” he said. “However, a real upturn will only succeed if the manufacturing sector regains its footing.”

UK, US Rates

On Dec. 18, the Bank of England announced its monetary policy for the month.

Unlike the ECB, the Bank of England opted to reduce its bank rate by 25 percentage points, to 3.75 percent.

According to the bank, inflation has declined to 3.2 percent, which is above the 2 percent target. However, inflation is now expected to fall back toward the 2 percent level more quickly over the near term.

“The extent of further easing in monetary policy will depend on the evolution of the outlook for inflation,” the bank said.

“On the basis of the current evidence, Bank Rate is likely to continue on a gradual downward path. But judgements around further policy easing will become a closer call.”

In the United States, the Federal Reserve reduced its benchmark interest rates by a quarter point last week to a range of 3.5 to 3.75 percent, aligning with wider expectations of a rate cut.

In the meeting, three policymakers dissented against a rate reduction and wanted to keep rates intact. This was the first time since September 2019 that three members dissented.

Speaking to reporters after the meeting, Fed Chairman Jerome Powell said the rate cut decision was a “close call.”

“I could make a case for either side,” he said. “We always hope that the data will give us a clear read. It’s a very challenging situation. I think we’re in a good place to … wait and see how the economy evolves.”