ECB holds rates at 2% but economists warn February meeting was no non-event

The European Central Bank left its key interest rate at 2% on Thursday, the fifth consecutive meeting without a move, but the consensus among economists is that the decision carries more weight than the unchanged headline suggests. Inflation has dipped to 1.7%, the euro has climbed nearly 14% against the dollar in a year, and the Governing Council spent time discussing downside risks to price stability that could yet force a shift in stance.

Inflation below target but the ECB stays put

Flash data from Eurostat released on Wednesday showed eurozone inflation cooling to 1.7% in January, below the ECB's 2% medium-term target. In normal circumstances, an undershoot of this magnitude might prompt speculation about further easing. Yet the central bank's statement emphasised resilience: low unemployment, solid private sector balance sheets, and the gradual rollout of public spending on defence and infrastructure are, in its view, underpinning growth.

Christine Lagarde, president of the European Central Bank, told the post-meeting press conference that the bank would maintain its data-dependent, meeting-by-meeting approach and would not pre-commit to a particular rate path. "In particular, our interest rate decisions will be based on our assessment of the inflation outlook and the risks surrounding it," she said. The euro was flat at $1.179 against the dollar after the announcement, a level that already incorporates significant appreciation over the past year.

The euro's rise and why it matters for inflation

Over the past month the single currency has strengthened 0.75% against the dollar, and it is up almost 14% over the last 12 months. The move reflects, in part, rising concerns over the unpredictability of US economic policy. For the ECB, a stronger euro is disinflationary: it makes imported goods, raw materials and energy cheaper, lowering production costs and consumer prices. That may help households and businesses in the short term, but central banks worry that persistent disinflation can tip into deflation, encouraging consumers to delay purchases and increasing real debt burdens for firms.

Francois Villeroy de Galhau, governor of the Banque de France, commented last week that the ECB is "closely monitoring this appreciation of the euro and its possible implications for lower inflation." Lagarde confirmed on Thursday that the Governing Council had discussed the exchange rate as part of its latest economic risk assessment. She noted that a stronger euro could bring inflation down beyond current expectations, while more volatile and risk-averse financial markets could weigh on demand and further lower inflation.

Economists split on the signal from Frankfurt

Deutsche Bank economists argued ahead of the meeting that it would be wrong to characterise February as a non-event. "The environment is marked by high uncertainty and two-sided risks," they wrote, adding that understanding how the ECB is thinking about those risks is important to gauging the policy path ahead. Their base case sees the deposit facility rate staying at 2% through 2026, with the next move a hike in mid-2027 driven by fiscal easing, a tight labour market and future inflation risks moving above target.

Greg Fuzesi, euro area economist at JPMorgan, took a more sanguine view. "The ECB looks at both the level of the currency, the speed of its movement and whether any changes are likely to persist, and none of this looks overly troubling or clear in the context of an economy that has recently been resilient to a variety of pressures," he said. He added that the calculus could change if growth indicators weaken or the currency strengthens much further, but neither is the case at present.

Sylvain Broyer, chief EMEA economist at S&P Global Ratings, suggested the central bank can afford to wait. "FX markets remain volatile and distorted by uncertainty, yet they're doing their job as shock absorbers. Financing conditions stay supportive, and growth continues to outperform expectations," he said. The ECB can keep the autopilot on until next month's updated economic projections, in his view.

The fiscal wildcard: defence and infrastructure spending

One factor distinguishing the current cycle from previous ones is the gradual rollout of public spending on defence and infrastructure across the eurozone. The ECB explicitly cited this as a support for growth in its statement. Germany's Zeitenwende package, France's military programming law, and the EU's own defence initiatives are beginning to feed through into demand. Deutsche Bank argues that domestic inflation will ultimately outweigh external disinflation, pointing to evidence that fiscal easing is starting to spur activity even as external risks have increased.

This creates a tension. The very spending that supports growth also risks keeping domestic price pressures alive, potentially pushing inflation above target in the medium term. That is the basis for Deutsche Bank's 2027 hike call. But the timing is uncertain: the transmission from budget announcements to actual outlays to measurable price effects is long and variable.

Trade policy and geopolitical uncertainty loom large

The ECB's statement flagged "ongoing global trade policy uncertainty and geopolitical tensions" as key sources of unpredictability. Lagarde elaborated that inflation could turn out lower if tariffs reduce demand for euro area exports by more than expected, and if countries with overcapacity increase exports to the euro area further. The reference to overcapacity points to China, where industrial policy has created substantial excess supply in sectors from steel to electric vehicles.

A Reuters poll in January found around 85% of economists expect the ECB to leave rates unchanged over the rest of 2026. That consensus reflects a view that the central bank has reached a resting point after a tightening cycle that took the deposit rate from -0.5% to 2% between July 2022 and September 2023, followed by a cutting cycle that brought it back to 2% by December 2025. The question is whether the rest lasts quarters or years.

March projections will test the wait-and-see stance

The next Governing Council meeting with updated staff macroeconomic projections is scheduled for March. Those forecasts will incorporate the latest inflation data, the euro's trajectory, and the evolving fiscal picture. If the projections show inflation stabilising at 2% over the medium term with growth holding up, the case for staying at 2% strengthens. If they show a persistent undershoot, or if the euro has appreciated further, pressure for a cut will build.