The European Central Bank (ECB) has firmly aligned with market expectations by signaling an end to its interest rate cutting cycle, opting instead to maintain its current stance amid a significantly improved economic outlook. During its December meeting, the ECB Governing Council held its key deposit rate steady at 2.0% for the fourth consecutive meeting, marking a pivotal moment in the eurozone’s monetary policy trajectory.
President Christine Lagarde reinforced the bank’s position that policy remains ‘in a good place,’ while explicitly acknowledging that neither rate cuts nor hikes were discussed during the deliberations. This stance comes as the ECB unveiled upgraded inflation projections for both 2025 and 2026, with the 2026 forecast notably revised upward to 1.9% from the previous 1.7% estimate.
The bank’s inaugural 2028 inflation projection provided particularly significant insight, showing a return to the ECB’s coveted 2% target. Concurrent upward revisions to growth forecasts further strengthened the argument against additional monetary easing, effectively dismantling the dovish perspective that anticipated further cuts to address potential inflation undershooting.
Market participants responded to the ECB’s communications with increased betting on the timing of the first rate hike, briefly pricing in more than a 50% probability of an increase by March 2027 before settling around 30%. This represents a dramatic reversal from earlier expectations that had anticipated potential cuts as recently as early December.
The ECB’s hawkish pivot gained momentum following recent comments from policymaker Isabel Schnabel, who had suggested that the bank’s next move might indeed be a hike. Lagarde’s subsequent remarks served as measured pushback against these expectations, emphasizing the ‘highly uncertain’ outlook and the bank’s commitment to maintaining policy flexibility amid evolving economic conditions.