The European Central Bank (ECB) is expected to leave interest rates unchanged this Thursday, maintaining its current stance. The backdrop favors such a decision: inflation now appears closer to the 2 percent target than previously assumed, while growth prospects are gradually improving. Under these conditions, policymakers seem comfortable keeping the deposit rate at 2 percent.
Markets are not anticipating a rate cut this week. According to a Bloomberg survey, all economists expect monetary policy parameters to remain unchanged, and Overnight Index Swap contracts are also pricing in no moves. While some dovish voices within the Governing Council have hinted at possible further reductions later in the year, and Reuters reports that internal discussions have raised the option of rate cuts, the focus for 2025 seems to be on stability. In my view, the ECB will concentrate on anchoring monetary conditions and avoid any major policy shifts this year.
At the same time, the ECB may adjust its inflation outlook upward. The current projection foresees price growth slowing further, with a temporary trough at 1.4 percent in Q1 2026 and a return to 2 percent in early 2027. However, higher oil price forecasts and an upward revision of the energy price path could push projections higher. Also noteworthy is the recent uptick in household inflation expectations, rising to 2.5 percent from 2.4 percent previously. While the increase seems modest, it matters economically. Household expectations are a key transmission channel for inflation in the longer term, shaping wage demands, pricing strategies, and consumption even before actual inflation changes. That’s why central banks are vigilant about keeping medium-term expectations anchored near 2 percent. In this context, even a small move from 2.4 to 2.5 percent signals drift, raising the risk of “de-anchoring.”
Economic activity in the eurozone is showing signs of improvement. The composite PMI index has risen for three consecutive months, reaching 51.0 — a level typically consistent with mild recovery in a three- to six-month horizon. The rebound is most visible in manufacturing, where the subindex recently crossed the 50 mark for the first time in three years. Cautious optimism is also supported by better financing conditions, which are partially offsetting trade barriers with the U.S. While the tariff agreement entails higher duties than before, it reduces policy uncertainty. ECB President Christine Lagarde noted that tariff levels remain “close to June assumptions.”
On Thursday, we could see a slight upward revision to Q3 GDP growth forecasts, and consequently for the full year, alongside a modest upward adjustment to the overall inflation path toward the target. Core inflation projections are unlikely to change significantly and should continue converging toward 2 percent. Overall, this outlook offers no compelling case for swift easing or renewed tightening. The most consistent strategy for the ECB appears to be maintaining the status quo — staying in “data-watching mode” while holding policy at a comfortable level, with the deposit rate at 2 percent.
Author: Łukasz Zembik, OANDA TMS Brokers
Source: ceo.com.pl
