The European Central Bank (ECB) signaled its willingness to maintain its interest rates aggressively high. Based on the recent economic indicators the economic expansion of the euro area is robust. In the third quarter of 2023, the region’s GDP grew by 0.2% q/q, a signal of resilience in the face of significant and evolving economic headwinds. This positive growth, alongside a rise in the October composite Purchasing Managers’ Index (PMI) to its highest level since May 2023, underscores the ECB’s ability to keep rates unchanged.
Indeed, flash inflation readings for Germany and Spain have both come in above expectations just recently. This has helped bring down the headline inflation rate to a steady 2.2% year-on-year across the euro area. The ECB’s medium-term inflation objective is still clearly anchored at 2%, with expectations tightly clustered around this target.
Ahead of the next scheduled ECB meeting in mid-March, markets are pricing in a modest 25bp rate cut. There’s one more cut than in November 2025 of one basis point and seven in 2026. The data we have now could be enough to spur a rethinking of these projected declines.
A clear majority of the ECB’s Governing Council members advocate for maintaining rates, citing the strength of economic growth as a significant factor. Yet the Governing Council has so far emphasized the symmetric nature of its medium-term inflation target, still clearly anchored at 2%. Fiscal policy contains its own upside surprises. Nonetheless, forecasts indicate that inflation will be hard pressed to reapproach the 2% target next year, mainly owing to expected base effects on energy inflation.
“I would not complain too much about growth at this point.” – Christine Lagarde
The ECB’s move to keep rates steady is a sign that the central bank is feeling its way through the new normal. Meanwhile, inflation is proving resilient, and GDP growth is proving unexpected. This can only inspire great confidence in the ability of the euro area to meet new challenges that will undoubtedly arise.
Outside factors play a large role in determining the macroeconomic landscape. Particularly important are the key developments, including the US-EU trade deal, and recent geopolitical shifts, including the ceasefire between Israel and Hamas, and de-escalation between the US and China. These factors are the weak euro. Providing some extra support to the euro area economy, this would further strengthen the case for the ECB to be cautious.
As the ECB heads into its next meeting, it will need to make critical debates on the course of monetary policy in light of all these changing circumstances. The central bank’s commitment to its medium-term inflation targets remains clear, with a focus on ensuring that inflation expectations remain anchored close to the 2% goal.