With some calling the current favorable environment central bank nirvana, the ECB avoided signaling its next step, suggesting that even a debate on policy adjustment is unlikely in the short term.“The economy remains resilient in a challenging global environment,” the ECB said in a statement. “At the same time, the outlook remains uncertain, mainly due to continued uncertainty over global trade policies and geopolitical tensions.”
The ECB added that its updated assessment reconfirms that inflation should stabilize at the 2% target over the medium term.
Messy environment threatens ‘good place’
Attention now turns to ECB President Christine Lagarde’s press conference at 1.45pm GMT. She is expected to repeat her mantra that policy is in a “good place”, and that there is no point in even discussing the direction of the ECB’s next change, whenever it occurs. The Governing Council is committed to ensuring that inflation stabilizes at the 2% target over the medium term, the ECB added. “A data-dependent and meeting-by-meeting approach will be taken to determine the appropriate monetary policy stance.”
Lagarde is meeting for the first time since Bulgaria joined the currency bloc and is also likely to face questions about volatility in financial markets, especially the impact of last week’s dollar drop and recovery on the ECB’s prospects.
A strong euro against the dollar reduces import costs, especially for energy, and curbs inflation at a time when it is already below target, albeit temporarily.
Inflation, the ECB’s main focus, fell to 1.7% across the eurozone last month on lower energy costs and could fall further before a forecast recovery next year, bringing back memories of the ECB’s struggle to reignite price growth in the decade before the COVID pandemic.
But the dollar’s move is not a dealbreaker for now and Lagarde is likely to repeat the ECB’s long-standing line that the exchange rate is just one factor driving the inflation outlook and not something the ECB has a target for.
With the dollar’s dip easing in recent days, the euro is actually weaker on a trade-weighted basis than at the December ECB meeting, reinforcing market and economists’ expectations of no interest rate changes in 2026, followed by some policy tightening later in 2027.
In any case, longer-term inflation expectations have been gradually moving up, not down, on solid activity data and energy price increases.
EUROPE HAS A COMPETITION PROBLEM
Lagarde will also likely point to healthy economic growth rates, historically low unemployment and solid wage growth data to support an optimistic tone.
The eurozone has proven surprisingly resilient to trade conflicts as domestic consumption appears to be cushioning the pressures caused by weak exports and poor industrial production.
Given exceptionally high domestic savings and a strong labor market, economists expect consumption to drive the bloc’s growth, with the German government’s planned budget spending on defense and infrastructure providing further impetus to expansion.
“The path of monetary policy in 2026 will depend on who wins the battle between external and internal conditions,” Deutsche Bank said in an analysis. “Our starting point assumes that domestic resilience will dominate and that will lead to (interest rate) increases in 2027.”
However, risks could still go the other way, and if inflation remains below target long enough to push expectations below 2%, policymakers may have no choice but to provide more support.
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