The European Central Bank left interest rates unchanged today as expected but offered no clues about its next move, even as investors continue to bet that more support will be needed as inflation dips below target next year.
The ECB halved its key rate in the year to June but has been on hold at 2% since, arguing that the economy of the 20-country euro zone is in a "good place" even if more easing cannot be ruled out.
Recent data has confirmed this sanguine view, giving policymakers time to understand how US tariffs, higher German government spending, looming Federal Reserve rate cuts and political turmoil in France might impact growth and inflation.
"We continue to be in a good place," ECB President Christine Lagarde told a press conference, adding inflation was "where we want it to be", the domestic economy was solid and uncertainty over global trade had eased after a number of US tariff deals.
"But we are not on a pre-determined path," she added, repeating the bank's mantra that its decisions would remain dependent on incoming economic data, and noting that today's decision was taken unanimously.
Money markets priced in a 50% chance of one last cut by next spring, even as they expect the Fed to ease US borrowing costs six times by the end of 2026.
Euro zone inflation is now seen at 1.9% in 2027, below the 2% projected in June, and core inflation is seen at 1.8% then, both below the ECB's 2% target, fresh projections showed.
In any case, the public debate is at the margins and focused on just a single rate cut, indicating that the ECB is done with the bulk of changes to monetary policy, with rates likely to stay around this level for an extended period.
The key debate is around how policymakers see risks, which Lagarde in her press conference described as "more balanced" than in June but still with a more uncertain than usual outlook for inflation.
Hawkish Governing Council members, opposed to further easing, say the economy has been unexpectedly resilient in the face of trade tensions and that growth is well supported by buoyant private consumption.
They point to rebounding industrial production and a surge in German government spending to argue that growth will remain on a moderately upward path.
Although US President Donald Trump's 15% tariffs on European Union imports are higher than predicted, firms are showing adaptability and the certainty of having agreed a deal offsets some of the negatives.
Lagarde said headwinds to economic growth from tariffs and the appreciation of the euro should fade next year, and noted that "substantial" spending on infrastructure and defence was in the pipeline from the region's governments.
Policy doves have argued that tariffs have yet to fully work their way through the economy and could dampen an already low growth rate, reversing the rise in consumption.
This could then weigh on prices next year, just when inflation is seen dipping below target, raising the risk that firms will change their pricing and wage-setting, thus entrenching anaemic price growth.
The Fed's looming rate cuts are likely to help the euro firm against the dollar, putting downward pressure on prices.
A fresh bout of political chaos in Paris, which has pushed French bond yields sharply higher, is another headache for the euro zone's central bank.
It has tools to intervene, but only for an "unwarranted and disorderly" rise in borrowing costs, which economists say is clearly not the case now, given France's high debt and feeble economic growth.
Asked to comment on France and the possibility of ECB intervention, Lagarde noted that euro area sovereign bond markets were orderly and functioning with smooth liquidity.
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