ECB Holds Rates Steady, Leaves Path for Possible Future Cut Open

The European Central Bank (ECB) kept interest rates unchanged on Thursday, as expected, while offering little guidance on its next steps. Policymakers signaled caution as inflation projections dipped below target for next year, keeping alive market speculation of a final “insurance” cut later in 2025.

Rates on Hold, Outlook Cautious

The ECB halved its key rate to 2% by June but has since paused further easing. Officials argue that the eurozone economy is currently in a “good place,” though they acknowledged lingering uncertainties from U.S. tariffs, higher German government spending, looming Federal Reserve cuts, and political instability in France.

In its statement, the Governing Council reiterated its determination to stabilize inflation at the 2% target over the medium term but avoided committing to a specific rate path. Fresh projections showed inflation dipping to 1.9% in 2027, with core inflation at 1.8%, both slightly below target.

Market Bets and Investor Expectations

Markets interpreted the cautious tone as leaving room for another rate cut. Investors now assign a 50–60% probability of one final cut by spring 2026, even as they expect the U.S. Federal Reserve to deliver as many as six rate cuts by the end of 2026.

Analysts note that while the ECB appears largely done with major policy shifts, rates are likely to remain anchored around current levels for an extended period.

Risks and Policy Divide

Debate within the ECB remains centered on risks.

• Hawkish members argue that the eurozone economy has been surprisingly resilient, pointing to stronger consumption, rebounding industrial production, and a surge in German fiscal spending. They also note that although Trump’s 15% tariffs on EU imports were higher than anticipated, firms are adapting, and the certainty of a negotiated trade deal offsets some negatives.
• Dovish members warn that tariffs may not have fully filtered through the economy and could weigh on growth just as inflation is projected to dip below target. This could reinforce weak price and wage dynamics, heightening the risk of entrenched low inflation.

For now, the ECB appears content to remain on hold while assessing incoming data. However, with inflation projected to undershoot and political uncertainties mounting, markets remain convinced that one last cut is possible before the end of the easing cycle.