The European Central Bank is set to leave its deposit rate at 2.0% on Thursday, extending a pause that began after September and signalling caution as policymakers weigh uneven data and renewed trade tensions.
Little has materially changed in the six weeks since the Governing Council last met. Officials then judged the eurozone to be in a ‘good place’; since that assessment, the euro’s earlier strength has faded and the full impact of fresh U.S. tariffs is still to be felt.
Headline inflation edged up to 2.2% in September, the first reading above target since April. The rise reflected resilient services prices and a reduced drag from energy. It did not surprise forecasters and, critically, it did not alter the medium-term picture. On current assumptions, the ECB expects inflation to ease to around 1.7% in 2026 and to remain below target through mid-2027.
September’s minutes indicated that risks were broadly balanced, though the discussion tilted towards weaker, not stronger, price pressures. Near-term disinflation is driven chiefly by the euro’s earlier appreciation and the possibility of surplus Chinese exports weighing on prices in Europe. Any inflationary impact from German fiscal measures is more likely to emerge over the medium term.
Markets have adjusted accordingly. After a brief swing towards deeper easing, money-market prices now imply roughly a 50% chance of another rate cut next year—down from nearer 80% a week earlier, when firmer oil and hints of fourth-quarter momentum nudged investors back from aggressive bets.
In September, a more hawkish tone from Frankfurt led some to push out expectations for any move in 2026. The ensuing volatility underlines how sensitive the pricing is to small shifts in growth, energy and exchange rates. Incoming readings on services inflation and wage dynamics, alongside oil and the euro, will do most of the work in setting the tone into year-end.
Economists point to three clear downside catalysts: a larger-than-assumed impact from new U.S. trade measures; a renewed bout of euro strength that tightens financial conditions; and a slower-than-expected pass-through from German stimulus.
The ECB has also warned that AI-driven valuations could unwind abruptly, with a knock-on tightening via equity and credit channels that would not be captured immediately in headline indicators. By the same token, durable services inflation, sticky wage growth or another leg higher in energy would argue for patience at current levels until disinflation is clearly back on track.
Fiscal and political developments sit in the background. France’s budget uncertainty has resurfaced after Socialist leaders again raised the prospect of government collapse, though this is unlikely to alter the ECB’s near-term stance. Sovereign curves across the euro area and the U.S. have already absorbed 2025’s tariff and fiscal headlines, with term premia doing some of the tightening. Banks’ external funding is another watchpoint: drying-up of dollar liquidity would pressure eurozone lenders, a channel that could transmit quickly if global risk appetite were to turn.
The external policy debate that touches the ECB most directly is the European Union’s handling of frozen Russian assets. The central bank has no formal vote, but it has been clear on two points: the need to follow international law and the importance of protecting the euro’s credibility as authorities seek to bolster the currency’s global role. One proposal circulating in Brussels would invest cash flows from matured Russian bond holdings at Belgium’s Euroclear into EU zero-coupon bonds, with the proceeds lent to Ukraine, leaving Russia’s legal claim to the underlying assets intact. President Christine Lagarde has said that a co-ordinated approach with other jurisdictions would be preferable. EU talks were paused last week and are due to resume in December. The broader determinants of the euro’s reserve-currency status—defence capabilities and the depth of capital markets—remain more decisive than any single financing scheme.
Against this backdrop, Thursday’s meeting is likely to be about communication discipline rather than action. Expect confirmation that policy is data-dependent, acknowledgment that tariff effects and external growth signals are not yet clear, and a pointer to December for a fuller discussion when fresh forecasts are in hand. For investors, three questions frame the months ahead: whether euro strength re-emerges as trade tensions evolve; how quickly German measures feed through to demand; and whether dollar funding strains test eurozone banks. Absent a decisive shift on those fronts, the ECB looks set to keep its hand steady—and its options open—into year-end.
Belgian Prime Minister sets 3 conditions for backing EU ‘reparations loan’ to Ukraine
