ECB to Hold Rates Steady Despite Global Strains: Decision Guide

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(Bloomberg) — The European Central Bank is set to hold interest rates steady for a fifth meeting, judging that the latest bout of global tensions and euro strength haven’t thrown the economy off course yet.

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The deposit rate will be kept at 2% on Thursday, according to all respondents in a Bloomberg survey. Analysts and markets see them staying there through the end of next year, with the chances of a hike in 2026 receding.

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Policymakers are digesting an eventful start to 2026 that’s included the strongest attacks to date on the Federal Reserve, the ouster of Venezuela’s president and threats by Donald Trump of more tariffs — this time over Greenland.

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The upshot has been a weaker dollar that briefly propelled the euro to its highest level since 2021. That could spell trouble for exporters just as the economy looks like finding its feet. There’s also a risk it will pull inflation further below the 2% target, though the danger is being offset by a rise in oil and gas prices.

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Without fresh projections to help navigate the tricky waters, President Christine Lagarde will probably keep her options open when she speaks to reporters at 2:45 p.m. in Frankfurt, 30 minutes after the decision is published.

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“The ECB probably won’t take a strong view on the exchange rate or the rise in energy costs, as the challenge to the forecasts is still limited,” Bank of America economist Evelyn Herrmann said. “They’re likely to put relatively more emphasis on the renewed rise in uncertainty since the start of the year.”

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Interest Rates 

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The ECB is showing little appetite to move borrowing costs in either direction, with Chief Economist Philip Lane saying the latest forecasts imply there’s no “near-term interest-rate debate.” Germany’s Joachim Nagel agrees, while Executive Board member Piero Cipollone reckons the ECB is “undoubtedly in a good place” — despite uncertainty.

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What Bloomberg Economics Says…

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“Europe has had a geopolitically turbulent start to the year, and the ECB will likely continue to focus on the forest instead of the trees. That means it will probably shrug off the recent US trade dispute linked to Greenland, the slight dip of inflation below its 2% target and the appreciation of the euro.”

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—David Powell and Simona Delle Chiaie. Click here for full PREVIEW.

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Officials are aware of how rapidly things can change, however. Austria’s Martin Kocher emphasized in a Bloomberg Television interview the need for “full optionality,” saying policy must be able to react to risks “quickly and decisively.” 

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While investors also expect no movement on rates, they see a bigger chance of another cut this year, while pricing greater odds of a hike further out.