ECB Holds Rates at 2.15%

The European Central Bank (ECB) kept its key interest rate unchanged at 2.15% on Thursday, in line with market expectations, while striking a more optimistic tone on the eurozone’s economic outlook, citing resilience in the face of global trade shocks and steadier domestic demand.

In a move that underscores growing confidence among policymakers, the ECB also revised up its growth and inflation forecasts for the 20-nation currency bloc. The updated projections suggest that the door may be closing on further interest rate cuts in the near term, following a year-long easing cycle that brought rates down from 4% to around 2% by June.

Inflation remains close to the ECB’s 2% target, driven largely by persistent price pressures in the services sector. The central bank said it had raised its 2026 inflation forecast, noting that inflation in services is now expected to ease more slowly than previously anticipated.

Recent economic data have outperformed the ECB’s earlier expectations. Exporters have adapted better than feared to U.S. tariffs, while household spending has helped offset a prolonged slump in manufacturing. Together, these factors have reinforced the view that the eurozone economy, though hardly booming, is proving more resilient than many had predicted.

Investors have taken the message as a sign that the easing cycle may have run its course. Still, the ECB was careful to avoid locking itself into any future policy path. In its statement, the bank reiterated that borrowing costs would be determined on a meeting-by-meeting basis, guided strictly by incoming data.

Questions are now beginning to shift from when rates might be cut again to whether they could eventually be raised. Some traders have started to price in modest chances of a rate increase toward the end of next year or in early 2027, though ECB officials appear keen to tamp down such expectations for now.

“It would be premature to have a serious discussion about rate hikes,” said Spyros Andreopoulos, founder of Thin Ice Macroeconomics, pointing to significant spare capacity that still exists in parts of the manufacturing sector.

Nonetheless, comments in recent weeks from ECB Executive Board member Isabel Schnabel, chief economist Philip Lane, and President Christine Lagarde herself have fueled speculation that rates could eventually move higher if inflation proves more persistent than expected.

According to a Reuters poll, most economists expect the ECB to keep rates at current levels through 2026 and 2027, though forecasts for 2027 vary widely, ranging from 1.5% to 2.5%.

The ECB now expects the eurozone economy to grow by 1.4% this year, followed by 1.2% in 2026, and 1.4% in both 2027 and 2028. Private-sector economists broadly share this outlook, pointing to planned German government investment in defense and infrastructure, a relatively tight labor market, and wages that are finally catching up with post-pandemic price increases.

“A stable labor market, continued growth in services, and German fiscal stimulus should support the eurozone economy in the coming months,” said Felix Schmidt, chief economist at Berenberg.

The central bank also raised its core inflation projections for 2026–2027, a key measure that strips out volatile elements and excludes the temporary effects of delays to the EU’s new carbon trading system. That system is expected to mechanically lower headline inflation in 2026–2027 before pushing it higher again in 2028.

Beyond domestic factors, ECB watchers are increasingly focused on exchange rates as a potential inflation driver. A stronger euro against the Chinese yuan could further undermine the eurozone’s competitiveness vis-à-vis China, while movements against the U.S. dollar remain sensitive to the pace of future Federal Reserve rate cuts.

“When you look at Europe’s trade balance, the competitiveness problem is much clearer with China than with the United States,” said Matthieu Lenoir of BNP Paribas. “For me, the key exchange rate isn’t euro–dollar, but euro–yuan.”