ECB Holds Rates at 2% as Eurozone Growth Proves More Resilient Than Expected

The European Central Bank kept interest rates unchanged on Thursday, signalling confidence in the eurozone’s economic resilience as growth continues to outperform earlier expectations and inflation remains close to target.

The ECB left its deposit rate at 2.00%, marking the fourth consecutive meeting without a rate change. The main refinancing rate was held at 2.15%, while the marginal lending facility remained at 2.40%. Policymakers reiterated that they are not pre-committing to any future rate path, maintaining a data-dependent, meeting-by-meeting approach.

The decision reflects improving economic conditions across the euro area. The ECB revised its 2025 growth forecast upward to 1.4%, from a previous estimate of 1.2%, citing stronger domestic demand, a resilient labor market, and growing investment in AI-driven innovation. Growth is now expected to reach 1.2% in 2026, 1.4% in 2027, and remain at 1.4% in 2028.

Despite lingering weaknesses in manufacturing, particularly in Germany, the eurozone has weathered US tariffs better than anticipated. Third-quarter growth was revised up to 0.3%, exceeding expectations, while household spending and employment have continued to support overall momentum.

Inflation remains broadly under control, coming in at 2.1% in November, close to the ECB’s 2% target. New Eurosystem projections show headline inflation averaging 2.1% in 2025, 1.9% in 2026, 1.8% in 2027, and 2.0% in 2028. Services inflation and wage growth remain elevated, but an EU decision to delay the ETS2 carbon pricing system is expected to ease inflation pressures later in the decade.

ECB President Christine Lagarde recently noted that the euro area is operating close to its potential, while stressing the need to boost productivity. Looking ahead, Germany’s planned defense and infrastructure spending, enabled by lifting its debt brake, is expected to provide additional stimulus in 2026.

Markets are increasingly debating whether the ECB’s next move could be a rate hike in 2026. Executive Board member Isabel Schnabel has warned that inflation risks may now outweigh growth risks, while other policymakers, including France’s François Villeroy de Galhau, have emphasized that downside inflation risks remain significant and that undershooting the target would not be tolerated.

“The Governing Council is determined to ensure that inflation stabilises at its 2% target in the medium term,” the ECB said, underscoring its cautious stance amid mixed global signals.

The ECB’s hold contrasts with recent moves by other major central banks. The Bank of England cut rates on Thursday, while the US Federal Reserve lowered borrowing costs last week, highlighting a growing divergence in global monetary policy paths as Europe shows signs of steady, if unspectacular, economic strength.

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