The European Central Bank (ECB) has opted to keep interest rates on hold, as tentative signs of economic recovery across the eurozone reduce the immediate need for stimulus.
Steady Policy Amid Improving Outlook
At its meeting on Thursday, 18 December 2025, the ECB's governing council left its benchmark deposit rate unchanged at 2%. This marks the fourth consecutive gathering where officials have held borrowing costs steady, following a single cut in June. ECB President Christine Lagarde is expected to reiterate that monetary policy remains "in a good place" during her subsequent press conference, echoing language from recent months.
The decision comes as recent economic data suggests the bloc is navigating persistent challenges better than some had feared. Adrian Prettejohn, Europe economist at Capital Economics, noted that purchasing manager surveys for December, while slightly softer, still indicate expanding business activity. This supports expectations that the 20-nation euro area will continue to see quarterly growth of around 0.3%.
Trade Clarity and Inflationary Pressures
A significant factor behind the improved confidence is the resolution of turbulent trade negotiations with the United States. Over the summer, U.S. President Donald Trump ultimately imposed a 15% tariff on European goods. While damaging for exporters, the deal struck with the European Commission removed a major cloud of uncertainty. "The haze of economic uncertainty has somewhat lifted, especially regarding trade," said economist Lorenzo Codogno. This allows businesses to plan with greater clarity.
However, the ECB's path to potential future rate cuts is blocked by stubborn inflation. Although the headline annual inflation rate fell to 2.1% in November—close to the bank's target—this was partly due to falling energy prices. More concerning for policymakers is inflation in the services sector, which remained elevated at 3.5%. This broad category, covering everything from hospitality to healthcare, suggests underlying price pressures are still too high to justify looser policy.
What This Means for the Eurozone
Analysts conclude that the current economic conditions mean the region can "get by" without the added boost of a rate cut for now. Higher interest rates help contain inflation by dampening demand for credit, affecting everything from mortgages to business investment. The governing council's stance indicates a shift away from any explicit "easing bias" towards future reductions.
The ECB's decision to hold firm underscores a cautious optimism. With growth modest but steady, and the immediate threat of a transatlantic trade war receding, the central bank is prioritising the ongoing battle against inflation over providing further stimulus to the economy.
