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The European Central Bank has opted to keep interest rates unchanged, a move that was widely anticipated by markets, while signalling that recent currency movements have not altered its medium-term policy outlook.

Having paused its policy easing cycle in June after a year of rate reductions, the ECB now finds itself in a more comfortable position. Economic growth across the euro area has proven more resilient than many expected, while inflationary pressures have continued to ease. Together, these trends have reduced the urgency for further monetary support.

In its latest statement, the central bank acknowledged ongoing uncertainty linked to global trade developments and geopolitical tensions. Despite these risks, policymakers maintained that their core assessment remains unchanged, with inflation expected to settle around the ECB’s 2 percent target over the medium term.

Speaking at a press conference, ECB President Christine Lagarde described the current environment as broadly balanced, with both upside and downside risks to the outlook. She reiterated that monetary policy is well positioned at present.

Addressing questions on recent volatility in the US dollar, Lagarde noted that exchange rate movements had been considered by the Governing Council. However, she pointed out that dollar weakness has been evident since early 2025 and has fluctuated within a familiar range for several months. As a result, the ECB views these currency developments as already factored into its baseline forecasts.

A stronger euro typically lowers the cost of imports, particularly energy, which can dampen inflation. While this effect can push inflation below target temporarily, recent movements have seen the euro weaken slightly on a trade-weighted basis compared with the ECB’s December meeting. This has reinforced expectations among economists and investors that interest rates are likely to remain unchanged through 2026, with potential tightening considered further out.

Lagarde again stressed that the ECB will continue to base decisions on incoming data and does not follow a pre-set path for interest rates.

Euro area inflation eased to 1.7 percent last month, driven largely by lower energy prices. It may soften further in the near term before rising again next year, a pattern that echoes the ECB’s long-running challenge with subdued price growth in the years before the pandemic. Nonetheless, longer-term inflation expectations have edged higher, supported by steady economic activity and firmer energy prices.

Despite weaker exports and sluggish industrial output, the euro zone economy has shown notable resilience. Domestic consumption has helped offset external pressures, supported by high household savings and a strong labour market. Economists also expect increased public spending, particularly in Germany on defence and infrastructure, to provide an additional boost to growth in the period ahead.

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