FRANKFURT – Euro area central bankers are widely expected to hold interest rates at current levels Thursday as officials continue to feel at home in the public lender’s “good place”.
Analysts said the European Central Bank looks unlikely to make any moves anytime soon, or this year for that matter, with the wide majority of economists suggesting the first shift in interest rates will come in 2027.
Inflation continues to abate, with the annual headline rate dropping to 1.7% last month, according to preliminary data from the EU statistics office. This was the lowest mark since September 2024, pushing it well below the ECB target of 2% over the medium term. More importantly, the core rate (likely what the ECB is really watching) dropped unexpectedly to 2.2% last month, its weakest since October 2021. These declines could revive talks of rate reductions, some observers noted.
But why cut if growth is good? The economy in the euro area surprised to the upside again (https://www.livesquawk.com/report/special_eurozone-q4-gdp-beats-forecasts-as-most-of-big-four-surprise-to-upside) in the final quarter of last year by holding at 0.3% q/q to match the result from the previous three months. This has added optimism about the outlook.
And a Societe Generale noted: “Data since December has been limited but broadly supportive of resilience and a gradual improvement: manufacturing confidence recovered in January and industrial output in Q4 looks strong, aided by the German fiscal stimulus. Services remain in expansion, while consumer confidence and spending lag. The German stimulus boosted industrial production and factory orders earlier than we expected and should build gradually over this year, though the Bundesbank recently warned of only moderate Q1 GDP growth.
Not all rainbows and lollipops
Conversely, German business confidence in January held at its lowest level (https://www.livesquawk.com/report/special_german-business-confidence-unchanged-amid-trade-flare-ups) since last spring, signalling caution about the among the county’s managers. The ongoing trade kerfuffle with Washington continues to rattle boardrooms and European capitals, with VW warning it may not be able to build a production plant for its Audi unit in the US due to that country’s tariffs on EU imports.
And preliminary purchasing manager indices in the euro area offered disparate trends last month, with improvements in the industrial sector and weakness in services businesses. S&P Global said its manufacturing measure climbed to a two-month high of 49.4 points, leaving is short of growth territory above 50 points. The services reading skidded to a four-month low of 51.9, with the two components combining to produce a 51.5 composite reading for the currency area, which was unchanged from December.
Some observers have suggested that the bank may need to change policy due to the strength of the euro versus the dollar. The pair briefly pushed past 1.20 last month, stoking concerns about increased costs for euro-denominated exports to the US, which is still an important European trade partner. However, the pair has since lost ground, threatening to go below 1.18 overnight and again during Wednesday’s morning session in Europe.
“The topic of the stronger euro should be a focus of the press conference though it’s mostly a weak dollar story for now and the move in the euro effective exchange rate is more muted than the euro/dollar rate suggests,” Societe Generale wrote. “At this stage, we don’t think it will be enough of a factor to shift the ECB’s forecasts.”
Nordea, like many, predicted it could be a long wait before officials move on monetary policy. “We continue to think the ECB will keep rates at current levels this year and see the risk picture gradually moving towards rate hikes, though as the start of the year has reminded us, downside risks have not disappeared either. We do not expect actual hikes until the second half of 2027, though.”
Societe Generale offered a similar yet slightly different take: “We maintain our view of no further cuts in 2026, while monitoring wage negotiations. Over time, we expect the ECB to calibrate rates slightly higher to stay neutral. Our baseline includes a first rate hike in December 2026, when focus will increasingly shift to 2028-29. If the economy stays resilient and capacity constraints emerge, early action could be prudent to contain inflation expectations.”
The next updates of the bank’s staff projections are due at the rate decision meeting on 19 March.
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session_info.http_referrer = data.http_referrer;
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var months = ['Jan','Feb','Mar','Apr','May','Jun','Jul','Aug','Sep','Oct','Nov','Dec'];
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- Inflation continues lower in January
- ECB decision due Thursday at 13:15 GMT / 14:15 CET
- Press conference set for 13:45 GMT / 14:45 CET
By Eric Culp
European Editor, LiveSquawk News
@eculp.bsky.social
@EricCulpLS
4 February 2026 | 11:40 GMT
FRANKFURT – Euro area central bankers are widely expected to hold interest rates at current levels Thursday as officials continue to feel at home in the public lender’s “good place”.
Analysts said the European Central Bank looks unlikely to make any moves anytime soon, or this year for that matter, with the wide majority of economists suggesting the first shift in interest rates will come in 2027.
Inflation continues to abate, with the annual headline rate dropping to 1.7% last month, according to preliminary data from the EU statistics office. This was the lowest mark since September 2024, pushing it well below the ECB target of 2% over the medium term. More importantly, the core rate (likely what the ECB is really watching) dropped unexpectedly to 2.2% last month, its weakest since October 2021. These declines could revive talks of rate reductions, some observers noted.
But why cut if growth is good? The economy in the euro area surprised to the upside again (https://www.livesquawk.com/report/special_eurozone-q4-gdp-beats-forecasts-as-most-of-big-four-surprise-to-upside) in the final quarter of last year by holding at 0.3% q/q to match the result from the previous three months. This has added optimism about the outlook.
And a Societe Generale noted: “Data since December has been limited but broadly supportive of resilience and a gradual improvement: manufacturing confidence recovered in January and industrial output in Q4 looks strong, aided by the German fiscal stimulus. Services remain in expansion, while consumer confidence and spending lag. The German stimulus boosted industrial production and factory orders earlier than we expected and should build gradually over this year, though the Bundesbank recently warned of only moderate Q1 GDP growth.
Not all rainbows and lollipops
Conversely, German business confidence in January held at its lowest level (https://www.livesquawk.com/report/special_german-business-confidence-unchanged-amid-trade-flare-ups) since last spring, signalling caution about the among the county’s managers. The ongoing trade kerfuffle with Washington continues to rattle boardrooms and European capitals, with VW warning it may not be able to build a production plant for its Audi unit in the US due to that country’s tariffs on EU imports.
And preliminary purchasing manager indices in the euro area offered disparate trends last month, with improvements in the industrial sector and weakness in services businesses. S&P Global said its manufacturing measure climbed to a two-month high of 49.4 points, leaving is short of growth territory above 50 points. The services reading skidded to a four-month low of 51.9, with the two components combining to produce a 51.5 composite reading for the currency area, which was unchanged from December.
Some observers have suggested that the bank may need to change policy due to the strength of the euro versus the dollar. The pair briefly pushed past 1.20 last month, stoking concerns about increased costs for euro-denominated exports to the US, which is still an important European trade partner. However, the pair has since lost ground, threatening to go below 1.18 overnight and again during Wednesday’s morning session in Europe.
“The topic of the stronger euro should be a focus of the press conference though it’s mostly a weak dollar story for now and the move in the euro effective exchange rate is more muted than the euro/dollar rate suggests,” Societe Generale wrote. “At this stage, we don’t think it will be enough of a factor to shift the ECB’s forecasts.”
Nordea, like many, predicted it could be a long wait before officials move on monetary policy. “We continue to think the ECB will keep rates at current levels this year and see the risk picture gradually moving towards rate hikes, though as the start of the year has reminded us, downside risks have not disappeared either. We do not expect actual hikes until the second half of 2027, though.”
Societe Generale offered a similar yet slightly different take: “We maintain our view of no further cuts in 2026, while monitoring wage negotiations. Over time, we expect the ECB to calibrate rates slightly higher to stay neutral. Our baseline includes a first rate hike in December 2026, when focus will increasingly shift to 2028-29. If the economy stays resilient and capacity constraints emerge, early action could be prudent to contain inflation expectations.”
The next updates of the bank’s staff projections are due at the rate decision meeting on 19 March.
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