The European Central Bank held its key interest rate steady at 3.5 percent on Thursday, signaling that inflation pressures across the eurozone have eased sufficiently to pause further tightening but not enough to begin cutting rates in the near term.
ECB President Christine Lagarde told reporters in Frankfurt that the governing council needed more data before committing to a definitive policy shift. She emphasized that the bank is not declaring victory on inflation, noting that services inflation remains sticky at four percent and wage growth continues to outpace productivity gains across the bloc.
The decision keeps the deposit facility rate at 3.5 percent, where it has sat since June. Markets had broadly expected the hold, with money market futures pricing in a first cut no earlier than March next year. European equities drifted lower on the announcement, with the Stoxx 600 index losing 0.3 percent.
Bond yields ticked higher immediately after the announcement, with the German 10-year bund rising four basis points to 2.38 percent. The euro strengthened modestly against the dollar to 1.0840, though traders said positioning was thin ahead of the Federal Reserve meeting next week.
Economists are divided on what comes next. A cohort at Goldman Sachs argues the ECB will cut twice before summer as growth stagnates and the manufacturing recession deepens. Others, including analysts at Deutsche Bank, expect only one cut, citing resilient labor markets and core inflation that remains stubbornly above target.
The bank also published updated staff projections, trimming its 2026 growth forecast to 0.7 percent from 0.9 percent, while holding the inflation outlook at 2.4 percent for the year. Lagarde stressed that these projections are conditional on energy prices remaining stable and on no further escalation in Middle East tensions that could disrupt supply chains.
Beyond rates, the ECB announced it would accelerate the runoff of its pandemic-era bond holdings, reducing the PEPP portfolio by 40 billion euros per quarter starting in January. The move tightens financial conditions without requiring formal rate hikes, a technical adjustment that some council members reportedly pushed back against.
Business groups across southern Europe expressed disappointment with the hold. Italian industrial association Confindustria warned that prolonged high rates risk pushing the bloc’s third-largest economy into its second recession in three years. Spanish officials echoed similar concerns, pointing to cooling domestic demand and a strengthening currency that hurts exports.
Looking ahead, attention shifts to the Federal Reserve decision next week and fresh inflation data from Germany and France. Any surprise in US policy could force the ECB to recalibrate, Lagarde acknowledged, though she insisted the bank sets policy independently based on eurozone conditions alone.