European Central Bank maintains 2% rate amid easing inflation

The ECB has once again kept its benchmark interest rate at 2%, holding firm for the fifth consecutive meeting. The decision came on Thursday and was fully unanimous, matching exactly what most economists had expected.

This pause follows slightly better-than-expected GDP growth and a drop in core inflation, which has now fallen to 2.2%, the lowest reading since late 2021.

The economy of the eurozone grew 0.3% in Q4 2025, beating forecasts. At the same time, headline inflation dropped to 1.7% in January, from 2% the previous month.

That decline gave the ECB more space to maintain its stance without needing to react urgently. President Christine Lagarde said, “We are in a good place, inflation is in a good place,” repeating a phrase she has used multiple times since last summer.

Governing council highlights strong economy and low joblessness

33In its official statement, the ECB’s governing council described the economy as “resilient in a challenging global environment.”

It pointed to low unemployment, higher public investment, increased defense spending, and healthy private sector balance sheets as signs of strength. They repeated their forecast that inflation should settle around the 2% target in the medium term.

The euro barely budged after the announcement. It rose just slightly against the dollar, sitting just below $1.181 by Thursday afternoon.

But currency concerns weren’t ignored. Lagarde confirmed that the governing council had talked about the exchange rate and the recent weakness of the dollar.

“The dollar weakness didn’t start yesterday,” she said. “It’s been going on since March 2025. We concluded that the impact since last year is incorporated in our baseline.”

One economist, Sylvain Broyer from S&P Global Ratings, said the ECB “can keep the autopilot on this time,” since the stronger euro is helping absorb external shocks while growth keeps surprising to the upside.

Last month, the euro even pushed past $1.20 for the first time since 2021, thanks in part to the falling US dollar. Some policymakers worry that a stronger euro might hurt exporters and suppress inflation, but so far, there’s no sign of panic.

Inflation drop seen as temporary, rate cut odds stay low

Lagarde cautioned not to read too much into the January inflation figure. “It’s a single data point,” she said. “We shouldn’t let monetary policy be held hostage by one number.” Still, she acknowledged that the ECB is happy to see core inflation drop closer to its preferred range. “We are pleased that it’s coming down towards our targets.”

Sören Radde, from hedge fund Point72, said, “This communication should cement expectations of a high bar for action and a prolonged hold.”

Meanwhile, Claus Vistesen, an economist at Pantheon Macroeconomics, said the latest policy statement had “a hawkish slant,” meaning it focused on good news while avoiding any talk of potential risks to inflation.

Traders in swaps markets still haven’t ruled out another cut later this year. But the odds are slim—only about a 20% chance for a 0.25% rate cut, according to current market pricing.

The ECB’s rate cuts, which began in June 2024, have already brought borrowing costs down to their lowest since December 2022.

Lagarde also fielded a question on AI. She didn’t hesitate to label investment in artificial intelligence as the “big story” across both public and private sectors. But for her, the real issue is whether all that spending actually helps.

“The really interesting thing from our perspective is how it will impact productivity, and how it will contribute or not to inflation, depending on the level of improved productivity,” she said.

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