European Central Bank expected to hold interest rates, markets focus on projections
- The European Central Bank is expected to hold key rates unchanged for the fourth consecutive meeting on Thursday.
- ECB President Lagarde is unlikely to offer fresh clues in the press conference following the announcement.
- EUR/USD could revisit the year’s peak at around 1.1920 in the upcoming days.
The European Central Bank (ECB) is holding its last two-day meeting of the year and will announce its monetary policy decision on Thursday. Financial markets anticipate the central bank will keep interest rates unchanged for the fourth consecutive meeting after reducing them on the main refinancing operations, the marginal lending facility, and the deposit facility in June to 2.15%, 2.4%, and 2%, respectively.
The ECB will also present fresh macroeconomic projections, with the focus on growth and inflation. Finally, ECB President Christine Lagarde will hold a press conference to explain the reasoning behind policymakers’ decision.
Ahead of the announcement, the EUR/USD pair trades with a positive bias, despite a near-term retracement, driven mainly by broad US Dollar (USD) weakness.
What to expect from the ECB interest rate decision?
The ECB has been among the first to cut interest rates and reach a neutral rate. President Christine Lagarde has repeatedly stated that monetary policy is in a “good place,” meaning it is well-positioned to address the current macroeconomic environment. Still, Lagarde has left the door open to any required direction, stating that decisions are data-dependent and that there is a meeting-by-meeting approach with no predetermined path.
There are good reasons to believe that she will stick to such a message: On the one hand, the Governing Council has noted that, despite headwinds, the Euro area economy has shown notable resilience. On the other hand, inflation has indeed been higher than expected, but held within reasonable levels. According to the latest Harmonized Index of Consumer Prices (HICP), annualized inflation rose by 2.1% in November, while the core annual HICP remained stable at 2.4%.
With no changes in interest rates and, most likely, in Lagarde’s words, investors will be taking clues from economic projections. Relative to September’s projections, both inflation and growth have been higher than expected. Yet as noted, inflation at 2.1% YoY is not a concern. Policymakers are likely to revise Gross Domestic Product (GDP) and HICP projections, with inflation most likely revised higher this year and lower in the next two years.
Regarding growth, policymakers seem more optimistic than the recent figures suggest. The latest Hamburg Commercial Bank (HCOB) Purchasing Managers’ Index (PMI) readings show economic progress remains tepid across the bloc. A rise in Eurozone business activity in December completed a full calendar year of growth for the first time since the COVID-19 pandemic, according to provisional PMI survey data. That said, the latest expansion in output was modest and the slowest in three months. GDP revisions will be interesting to see.
Finally, speculative interest will be watching whether officials maintain the hawkish view that denies the odds for additional rate cuts in the foreseeable future.
Analysts at BNP Paribas noted: “The publication of the new macroeconomic projections should also confirm the upward revision of growth forecasts for 2026. Against this backdrop, we believe that the ECB is unlikely to cut its policy rate any further and that its next move could even be an increase (in Q3 2027). This environment, against a backdrop of more expansionary fiscal policy in Germany, should lead to additional upward pressure on bond yields in 2026, with the 10-year Bund exceeding 3% in the second half of 2026, according to our forecasts.”
How could the ECB meeting impact EUR/USD?
As previously noted, the EUR/USD pair trades with a modest bullish bias heading into the year-end. Generally speaking, a hawkish ECB monetary policy decision should back demand for the Euro (EUR), while a dovish outcome should put pressure on the local currency. The general consensus is that the ECB will maintain its hawkish stance, particularly if President Lagarde repeats the message that the ECB is in a good place, coupled with downward revisions to inflation and upward revisions to growth expectations.
Valeria Bednarik, FXStreet Chief Analyst, notes: “From a technical point of view, the EUR/USD pair is mostly bullish, although solely depending on USD demand. The EUR has little life of its own lately, and the ECB announcement will likely have a reduced impact on the EUR.”
Bednarik adds: “Within the ECB decision, the US will release the Consumer Price Index (CPI), which may trigger some volatile price action. Higher-than-anticipated inflation figures will likely boost speculation of additional rate cuts in the US, leading to some USD weakness, while the opposite scenario is also valid. Keeping that in mind, EUR/USD peaked at 1.1804 this December, the immediate resistance level. Once beyond it, the pair may retest the 2025 peak at 1.1918. Near-term support lies at 1.1690, followed by the 1.1620/40 price zone. A slide towards the latter should attract buyers.”
Economic Indicator
ECB Rate On Deposit Facility
One of the European Central Bank's three key interest rates, the rate on the deposit facility, is the rate at which banks earn interest when they deposit funds with the ECB. It is announced by the European Central Bank at each of its eight scheduled annual meetings.
Read more.Next release: Thu Dec 18, 2025 13:15
Frequency: Irregular
Consensus: 2%
Previous: 2%
Source: European Central Bank
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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