As analysts widely expected, the European Central Bank kept its benchmark interest rate untouched on Thursday. This comes as the eurozone economy shows signs of resilience and inflation remains close to the ECB’s 2% target.
ADVERTISEMENT
The European Central Bank kept its key interest rate on hold on Thursday during the first monetary policy meeting after the European Union and the US sealed a trade agreement.
The bank held its rate on the so-called deposit facility at 2%, which is the interest rate banks receive when they deposit money with the central bank overnight. It's also the ECB’s main tool to influence monetary policy.
The rate has hovered at 2%, its lowest level in more than two years, since June — when the central bank cut by 25 basis points. The governors then left the instrument unchanged at the July meeting.
The ECB has cut its key interest rate eight times in total since June 2024, bringing it down from a record high of 4%.
The other two rates, concerning the main refinancing operations and marginal lending facility, were also kept unchanged on Thursday, at 2.15% and 2.40%, respectively.
The interest rate on the main refinancing operations is the rate banks pay when they borrow money from the ECB for one week, while the marginal lending facility is the rate banks pay when they borrow from the ECB overnight.
Analysts expected the ECB to leave the key rates untouched on Thursday as the bloc’s economy performs relatively well and inflation is close to the ECB’s 2% target.
“We are in a good place because inflation is at 2%. But we’re not focused on data points. We’re looking at all sorts of data," said ECB President Christine Lagarde after the last Monetary Council meeting.
"And our target is the medium-term inflation, which is at 2%. So I’m saying that we are in a good place because our projections point to inflation stabilising at target in the medium term.”
The latest flash estimates showed that prices rose by 2.1% in August, following readings of 2% in June and July.
The eurozone's economic prospects
Despite Lagarde's encouraging words, the bloc is facing challenges, including renewed political turmoil in France, which could choke investments due to the uncertainty clouding the European Union’s second-largest economy.
With the EU-US trade agreement sealed, the eurozone is facing more clarity, but the real impact of the pact is yet to be assessed by the ECB.
The majority of EU-based businesses producing goods exported to the US are facing a 15% tariff on the goods they sell, while the majority of US-made goods imported by the EU are exempt from duties.
“The trade agreement with the US has reduced some of the worst tail risks and should lay the foundation for a moderate improvement in activity next year, as firms finally have more clarity on their business outlook,” Ángel Talavera, the head of European macro at Oxford Economics, said in an analysis.
“But with uncertainty still very high, weak growth in exports and investment will continue to shape the immediate outlook."
Experts at Oxford Economics predict that eurozone growth will remain lacklustre in the near term, dragged down by weaker global demand and uncertainty. They expect 0.8% growth in the eurozone in 2026, while inflation is expected to dip below 2% next year.
Oxford Economics expects the ECB to cut one more time in December, “but there is a reasonable chance it will stay put,” according to their analysis.
ECB President Christine Lagarde is set to speak about the latest fiscal developments in the bloc at her press briefing later this afternoon.
