The European Central Bank held interest rates unchanged at its first monetary policy meeting of 2026 on Thursday, keeping the deposit facility rate at 2.0%, the main refinancing rate at 2.15%, and the marginal lending rate at 2.40%. The decision, which was unanimously expected by markets, marks the fifth consecutive meeting without a change in policy since the ECB completed its cutting cycle last June.
ECB President Christine Lagarde described the current stance as being in a "good place," reiterating that inflation is expected to stabilise around the bank's 2% target over the medium term. But beneath the surface calm, several developments are testing the durability of this comfortable equilibrium.
Inflation Falls Below Target
Flash data released just hours before the ECB's decision showed that eurozone inflation cooled to 1.7% in January, the lowest reading since September 2024. Core inflation — which strips out volatile food and energy prices — also surprised to the downside, slipping to 2.2%, its lowest level since late 2021. These numbers add fuel to the argument that the ECB's next move could be downward, even if the bank currently insists it is in no hurry to act.
Lagarde acknowledged that inflation figures may move "unevenly" in the months ahead and cautioned against reading too much into any single data release. But the direction of travel is unmistakable: the disinflationary impulse from weak energy prices, a stronger euro, and the flood of cheap Chinese imports is pulling prices lower.
The Euro's Rise
The euro's recent appreciation against the US dollar — it entered 2026 trading around $1.16 — has emerged as a point of concern within the Governing Council. A stronger euro makes European exports less competitive while also putting downward pressure on imported inflation, potentially pushing price growth further below the 2% target.
Austria's central bank governor Martin Kocher publicly warned that further euro appreciation could force the ECB to resume rate cuts, while France's François Villeroy de Galhau identified the dollar's recent depreciation as a key factor shaping the bank's outlook. The currency dynamic adds a new layer of complexity to what the ECB had hoped would be a straightforward period of steady-state policy.
Markets Price In a Long Pause
Around 85% of economists surveyed by Reuters in January expected the ECB to leave rates unchanged for the entirety of 2026. Deutsche Bank's base case is that the deposit rate stays at 2% through the year, with the next move being a hike — not a cut — in mid-2027, driven by fiscal loosening, a tight labour market, and inflation risks eventually shifting upward again.
However, several analysts cautioned against treating the February meeting as a non-event. The environment is characterised by unusually high uncertainty and risks that cut both ways. A sharp escalation in trade tensions, a deeper-than-expected slowdown in global demand, or a continued appreciation of the euro could all tip the balance toward easing. Conversely, fiscal stimulus from increased defence spending and potential infrastructure investment could reignite inflationary pressures.
Looking Ahead
The ECB's next meeting on March 18–19 will be accompanied by updated staff economic projections, which will provide a clearer picture of how the bank views the evolving landscape. Until then, Lagarde's message is one of patience — but patience, she stressed, should not be confused with passivity. The "good place" is comfortable. Whether it is sustainable is another question entirely.