Inflation near target but risks remain
Inflation in the euro zone has stabilized close to the European Central Bank’s 2% target, supported mainly by persistent price pressures in the services sector. Policymakers expect inflation to hover around this level for some time, even as energy prices ease. This relatively balanced inflation picture has encouraged markets to believe that the easing cycle is largely complete after the ECB cut its policy rate from 4% to 2% by last June.
Despite this, ECB officials are reluctant to offer clear guidance. According to sources, the central bank is not ruling out either rate cuts or hikes, citing an unusually high level of uncertainty linked to geopolitical tensions, global trade risks and financial market imbalances.
Lagarde keeps all options open
ECB President Christine Lagarde stressed that the decision-making process remains fully data driven. Speaking after a policy meeting that concluded earlier than usual, she said the view among policymakers was unanimous that forward guidance is not appropriate in the current environment.
Lagarde reiterated that interest rate decisions will be taken meeting by meeting, depending on incoming economic data, and that the ECB is not committing to any predefined path for borrowing costs.
Growth outlook slightly improved
The ECB’s latest projections show a modestly stronger growth profile for the euro area than previously expected. The central bank now forecasts economic growth of 1.4% this year, followed by 1.2% in 2026 and 1.4% in both 2027 and 2028.
Officials point to resilience in exports and a relatively tight labor market, where wage growth has finally begun to offset the post pandemic rise in prices. Planned investments in defense and infrastructure, particularly in Germany, are also expected to support activity.
Speculation about future rate hikes
While the ECB still expects inflation to dip below target in the coming years before returning to 2% by 2028, some policymakers have acknowledged that services inflation could ease more slowly due to wage pressures. Recent remarks from senior ECB figures have fueled limited market speculation about a possible rate hike late next year.
Financial markets are pricing a small chance of tighter policy in 2026 or early 2027, although most economists expect rates to remain unchanged through that period. For now, analysts agree that the threshold for any policy move remains high.
