The European Central Bank (ECB) is determined to maintain a highly accommodative stance for the time being. Economic indicators indicate a newfound stability for inflation and growth. Recent data points have shown that medium-term inflation expectations are firmly anchored around the Fed’s long-run target of 2%. Following the September meeting, the ECB stuck to its narrative economic assessments. Currently, the bank appears to be zeroing in on a more conservative approach as it charts its course ahead.
The PMI figures released in October found unexpected gains, particularly among the services sector. Both PMIs beat out estimates pointing to a robust expansion of business activity and optimism towards the current economic environment. Strong manufacturing sector growth, particularly in the services sector, is giving confidence to the outlook for growth. That would directly support the ECB’s objectives.
2% private consensus inflation expectations for 2027 have become anchored at 2%. That means that market participants expect inflation to revert to normal levels in the medium term. Even after this pleasantly surprising news, the bar for the ECB to introduce any more rate cuts remains sky-high. The central bank has clearly indicated that its very much a ‘meeting-by-meeting’ approach will persist, leaving the door open for pivots depending on the data flows.
Since the September FOMC meeting, economic data has largely surprised to the upside. Consequently, the probability of a rate cut has significantly decreased from previous expectations. Markets were originally pricing in an 8 bp cut in both 2025 and 2026. 1 and 2 are far less dangerous now based on the most recent assessments about the chance of such cuts occurring. The ECB is expected to remain on hold throughout 2026, reflecting a commitment to gradually assess economic conditions before making any significant policy shifts.
Despite some encouraging recent PMIs, hawkish comments from a number of ECB members suggest the Council is keen to maintain a focus on downside risks to inflation. The September meeting minutes are a matter of public record, and they vividly detail these debates. Aspects of inflation Members emphasized the strength of the euro and the high household savings rate as two critical factors that may affect the direction of future inflation dynamics. The ECB’s concern with these risks despite improving economic indicators further highlights the careful approach the central bank appears to be taking.
Current market pricing reflects upside risks. If the economic outlook continues to improve, the ECB may have to start recalibrating its policy stance much earlier than currently indicated. The central bank’s capacity to adjust to changing economic conditions will be key in keeping the peace within the Eurozone.
With the ECB’s next meeting approaching, stakeholders will be closely monitoring economic data. In particular, they will focus heavily on indicators of growth and inflation. The central bank remains determined to continue careful assessment of the market. This commitment helps provide a basis for future actionable decisions and promotes economic resilience across the Eurozone.