The eurozone has managed to weather US tariffs more effectively than expected. Growth remains resilient, while inflation continues to hover around the ECB’s 2% target.
The European Central Bank left its key deposit rate unchanged at 2% on Thursday for a fourth consecutive meeting.
Interest rates on its main refinancing operations and the marginal lending facility will also remain at 2.15% and 2.40% respectively.
The rate on the main refinancing operations is the rate banks pay when they borrow money from the ECB for one week, while the marginal lending facility is the rate banks pay when they borrow from the ECB overnight. The deposit facility is the interest rate banks receive when they deposit money with the central bank overnight.
Recent growth figures for the eurozone have been more robust than expected, prompting the ECB to lift its outlook once again — following an upgrade in September. The central bank said on Thursday that it forecasts the region’s output at 1.4% in 2025, up from a previous estimate of 1.2%.
Growth is predicted at 1.2% in 2026, 1.4% in 2027, and it is expected to remain at 1.4% in 2028.
The ECB has become progressively more optimistic this year as US tariffs have proved less economically damaging than feared.
While the levies are still constraining exports, third-quarter growth in the eurozone was revised up to 0.3% this month, surpassing expectations.
Despite manufacturing remaining a sore spot for the region — with particularly dire indicators in Germany — the eurozone’s labour market remains strong, along with domestic spending. An appetite for AI innovation has supported investment this year, and sentiment indicators point to continued resilience.
Looking ahead to 2026, the German government’s planned spending on defence and infrastructure, facilitated by the lifting of the debt brake, is expected to provide further economic stimulus.
“We are quite close to potential, but there’s a lot to be done in terms of improving productivity in the euro area,” ECB President Christine Lagarde said earlier in December at a Financial Times Global Boardroom event.
A rate hike in 2026?
Ahead of the ECB’s data release on Thursday, analysts had been speculating about a potential rate hike in 2026.
Such predictions were fuelled by comments from executive board member Isabel Schnabel, who suggested in early December that inflationary risks are now greater than the potential for an economic slowdown. She noted that services inflation and wage growth have been stronger than expected, meaning she is “comfortable” with investor bets on the next move being a hike. Her rhetoric diverged from the more dovish language used by the ECB committee as a whole, hinting at diverging views within the group.
France's François Villeroy de Galhau, another committee member, said in a speech earlier in December: “The downside risks on the inflation outlook remain at least as significant as the upside risks, and we would not tolerate a lasting undershooting of our inflation target.”
Inflation was recorded at 2.1% in November, and it has been hovering close to the ECB’s 2% target since early 2025, boosted by price hikes in the services sector. An EU decision to delay a new carbon-pricing system (ETS2) is expected to keep inflation lower than expected in 2027.
New Eurosystem staff projections show headline inflation averaging 2.1% in 2025, 1.9% in 2026, 1.8% in 2027 and 2.0% in 2028.
"The Governing Council is determined to ensure that inflation stabilises at its 2% target in the medium term," said the ECB on Thursday. "It will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance."
The ECB’s decision comes after the Bank of England decided to cut its key UK interest rate on Thursday. It also follows the US Federal Reserve’s move to lower borrowing costs last week.