ECB Holds at 2% as Inflation Near Target, but Services Keep Policymakers Cautious

The European Central Bank (ECB) left interest rates unchanged on Thursday, keeping the deposit rate at 2%, in a decision that was broadly expected as inflation trends stay close to the bank’s target and policymakers avoid locking themselves into a fixed easing path.

The ECB previously cut rates in June, lowering the deposit rate to 2% from 4% within a year, but has since paused further cuts. In its statement, the central bank reiterated that it is “not pre-committing to a particular rate path,” reinforcing a meeting-by-meeting approach guided by incoming data.

Updated inflation path: near target overall, but “sticky” services linger

New Eurosystem staff projections show inflation settling close to the ECB’s 2% medium-term objective:

• Headline inflation: 2.1% (2025), 1.9% (2026), 1.8% (2027), 2.0% (2028)
• Core inflation (ex-energy & food): 2.4% (2025), 2.2% (2026), 1.9% (2027), 2.0% (2028)

The ECB highlighted that inflation was revised up for 2026, largely because services inflation is expected to decline more slowly than previously assumed—an important detail because services prices are often tied to wage dynamics and domestic demand, making them harder to cool quickly.

Growth outlook upgraded: domestic demand doing more of the heavy lifting

The ECB also upgraded its growth forecasts versus September, pointing to firmer domestic demand:

• GDP growth: 1.4% (2025), 1.2% (2026), 1.4% (2027), 1.4% (2028)

This matters because stronger internal demand can support growth—but it can also make the ECB more cautious about cutting too quickly if it risks keeping services inflation elevated.

Market reaction: euro steadies after earlier dip

Following the decision, the euro rebounded, turning flat on the day against the dollar after earlier weakness, trading around 1.1735. The move suggests markets interpreted the ECB as neutral-to-cautious: inflation is close enough to target to stay on hold, but the bank is not signaling urgency to restart cuts while services inflation remains sticky.