Lagarde says the eurozone economy is 'in a good place' as the ECB keeps its benchmark rate steady at 2.00%. With inflation near target and growth revised up, rate cuts are off the table, for now.
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The European Central Bank left its key interest rates unchanged on Thursday, maintaining the deposit facility rate at 2.00%, as President Christine Lagarde signalled growing confidence that inflation is stabilising near the ECB’s 2% medium-term target.
Speaking at the post-meeting press conference in Frankfurt, Lagarde stated that the “disinflationary process is over” and that the eurozone is “in a good place”, citing a resilient labour market, a stable inflation outlook and upwardly revised growth projections for 2025.
However, she was keen to emphasise that the ECB is “not on a predetermined path”, and future policy moves will depend on economic data.
A pause or a pivot?
Thursday’s decision to hold rates was unanimous across the Governing Council and largely expected by markets.
It marks the third consecutive meeting where the ECB refrained from changing its policy stance following a 200 basis point easing cycle that began in mid-2024.
Lagarde stressed that inflation is now where the ECB wants it to be and that the central bank’s past actions are still feeding through the economy.
Despite speculation that the rate-cutting cycle has now reached its endpoint, Lagarde was careful not to endorse that view explicitly.
“We are data-dependent,” she insisted, noting that any future changes will be assessed meeting-by-meeting, based on the inflation outlook and the strength of monetary policy transmission.
In response to suggestions the ECB may be done cutting rates altogether, Lagarde pushed back: “Let’s not over-engineer this. We will look at the data, all the data, and decide accordingly.”
Inflation stabilising near target
New ECB staff projections show headline inflation averaging 2.1% in 2025, falling to 1.7% in 2026 and rising slightly to 1.9% in 2027. Core inflation, which excludes volatile food and energy prices, is expected to follow a similar path, easing from 2.4% in 2025 to 1.8% by 2027. Recent data offers some support to this narrative.
Eurozone inflation edged up slightly to 2.1% in August, while underlying inflation indicators, such as services and goods prices, remained broadly stable.
Wage growth is also moderating: year-on-year growth in compensation per employee slowed to 3.9% in the second quarter, down from 4.8% a year earlier.
Lagarde suggested this moderation in wage pressure, coupled with productivity gains, will help anchor inflation in the coming years.
“Most measures of longer-term inflation expectations continue to stand at around 2%,” she said. “We see risks as more balanced than in June, thanks to reduced trade tensions."
Growth outlook improves
The ECB also upgraded its growth forecast for 2025 to 1.2%, up from 0.9% in June. Growth is seen slowing to 1.0% in 2026 before ticking up to 1.3% in 2027.
According to Lagarde, the first half of the year saw cumulative GDP growth of 0.7%, supported by resilient domestic demand and robust consumer spending.
“Investment and consumption are holding up better than expected,” Lagarde said, adding that looser financing conditions, rising disposable income and strong labour market fundamentals are helping to support demand.
The unemployment rate stood at 6.2% in July and is projected to decline further, which could bolster household consumption in the months ahead. However, external headwinds remain.
The ECB highlighted that trade tensions, higher tariffs and a stronger euro could weigh on exports and dampen activity, particularly in the second half of the year.
But Lagarde expressed confidence that “these effects should fade next year”, as recent trade deals ease uncertainty.
No rate path commitment
In line with previous messaging, the ECB reaffirmed its commitment to a “meeting-by-meeting” approach and declined to provide forward guidance on future interest rate moves.
Lagarde reiterated that “we are not pre-committing to a particular rate path”, while leaving the door open to adjust all instruments if inflation threatens to deviate from target. Market participants looking for clearer signals on the direction of travel were left with a familiar refrain: optionality remains the name of the game.
When asked whether current market expectations — which price in no further rate cuts — align with the ECB’s view, Lagarde offered a diplomatic shrug.
“Markets do what they have to do, and we do what we have to do,” she said.
Regarding risks of market turbulence linked to France’s political situation, Lagarde emphasised that eurozone sovereign bond markets remain orderly and continue to function smoothly. She reiterated that the ECB stands ready to intervene if financial fragmentation threatens the effective transmission of monetary policy.
The message to markets: no rush
As inflation remains at target and growth is improving, the ECB made clear it sees no urgency to move again soon.
The tone was cautious but confident: a pause, not a pivot.
The next policy meeting will take place in Florence on 30 October. Until then, the ECB’s stance is clear: stay the course, watch the data — and stay in "a good place".
