ECB holds rates at 2%, signals cutting cycle is likely over

The European Central Bank (ECB) held its deposit rate at 2% today after eight cuts from the 4% peak, with officials saying the cycle is now “most likely” finished, according to its latest end-of-year outlook.

Board officials said the rate can stay at this level unless the economy faces another major shock, and they also said any debate about raising rates was seen as too early.

Economists who tracked the meeting expected the hold to last for around two years, and traders also priced in almost no movement either way as the decision came out.

Markets reacted in small moves. The two-year yield, which reacts fast to policy signals, moved up almost one basis point to 2.14% before easing a bit.

After holding the rate steady, officials raised their growth outlook and said they expect inflation to fall below the 2% goal in 2026 and 2027 before climbing back to that target in 2028. They also see underlying price growth running stronger than the headline number. One policymaker added that more cuts could still happen if inflation stays under the target for months.

ECB President Christine Lagarde told reporters in Frankfurt that the Governing Council did not talk about hikes or cuts. Christine said:

“There was unanimous agreement around the table about the fact that all optionalities should be on the table and that we should stick to the meeting-by-meeting approach, to the data dependency.We do not have a set path for our rates going forward.”

Christi also stressed that the group will not lock itself into a preset direction.

ECB officials outline inflation path and discuss AI investment

Officials said the growth upgrades came from fresh projections showing more stable momentum across the region, even as inflation stays weak for a while. They expect the return to 2% to take several years.

Economists who reviewed the meeting said the hold lined up with the outlook, which is why the market reaction was quiet.

Christine also talked about artificial intelligence and said AI is lifting parts of Europe’s economy. She said, “We think that there is some change taking place in our economies. If you look in particular at the drivers and what has surprised us on the upside, it’s characteristically investment” in AI. She said both public and private spending on AI has grown, and most of the push is coming from private firms that are expanding adoption.

OECD Secretary General Mathias Cormann said AI spending has jumped and helped counter the drag from trade uncertainty this year.

Christine added that surveys show the private sector is behind most of the rise and said it will take time to know how long this trend lasts. She also said central banks around the world are studying how AI will affect growth, noting that the Federal Reserve expects heavy long-term effects but has not taken a firm view on timing.

ECB tracks tech growth and moves digital euro forward

The push into AI also came up in the wider debate about Europe’s growth outlook. A 2024 report by former ECB President Mario Draghi said Europe slipped behind the US because it did not take advantage of the first digital wave.

Christine said the region can gain ground by backing AI adoption and fixing roadblocks to its spread.

Christine also updated reporters on the digital euro. She said, “These are important moments for the digital euro because we have done our work, we have carried the water, but it’s now for the European Council and certainly later on for the European Parliament to identify whether the Commission proposal is satisfactory, how it can be transformed into a piece of legislation or amended.”

She said the plan is to create a form of central bank money that works in the digital age. She added that the currency now exists mainly as banknotes, but it needs “a digital expression of that sovereignty and a digital anchor for the purpose of the financial system that we have. So that’s what we’re pursuing.”

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