The European Central Bank (ECB) is anticipated to maintain its current interest rates as inflation in the Eurozone remains above 2%, although it is expected to decline in the coming years. Given the subdued growth projections, central bank officials see little advantage in making any policy alterations at present. Market participants largely agree that interest rates will be kept on hold, with a greater risk of prolonged periods of below-target inflation rather than another rise in price growth.
Euro-area inflation rose to 2.2% year-on-year in September, marking an increase from 2% in August and reaching its highest level since April. This rise has complicated the ECB’s decision-making as officials prepare for their upcoming meeting. The inflation increase was primarily due to a slower decrease in energy prices, and while core inflation remained stable, services inflation rose to 3.2%. This indicates that underlying price pressures remain persistent.
Despite the decrease from the peak levels observed after the pandemic, the outlook for inflation remains concerning. The ECB’s Chief Economist noted that inflation is unlikely to return to the pre-pandemic lows or exceed the 2% target in the medium term. However, the inflation picture varies significantly across member states. For example, Estonia had the highest annual inflation in September at 5.2%, with Croatia and Slovakia both at 4.6%. Other countries like Latvia, Austria, and Spain also reported rates significantly above the ECB’s target.
Concerns are growing among policymakers that inflation might dip below target levels in the years to come. The ECB President indicated that inflation is unlikely to deviate significantly from the 2% target in the near future, especially as trade disruptions diminish and economic growth slows. Updated staff forecasts indicate that headline inflation is expected to average 2.1% in 2025, before reducing to 1.7% in 2026, and slightly recovering to 1.9% in 2027. Excluding food and energy costs, inflation is projected to be slightly higher, starting at 2.4% in 2025 but dropping subsequently. These forecasts highlight the potential risk of inflation falling short of the target as wage growth slows and external influences—such as decreased demand and softer trade flows—continue to suppress price increases.
The growth outlook for the Eurozone remains fragile. According to recent statistics, GDP growth was just 0.1% in the second quarter of 2025, down from 0.6% in the first quarter. Annually, the economic output increased by 1.5%, only marginally less than the 1.6% in the previous quarter. Economic performance varied significantly among member states, with Denmark and Croatia leading with respective growth of 1.3% and 1.2% quarterly, while Finland, Germany, and Italy recorded contractions.
The ECB’s projections suggest that the Eurozone economy will expand by 1.2% in 2025, an improvement compared to earlier forecasts but still weak in historical contexts. Looking ahead, growth is expected to slow further to 1.0% in 2026 before marginally increasing to 1.3% in 2027. The policymakers indicated that near-term challenges such as tariffs, a stronger euro, and rising global competition are factors that contribute to this subdued growth expectation, although they anticipate that these effects may diminish as new trade agreements take effect and economic uncertainty reduces.
Overall, the ECB is widely expected to refrain from adjusting borrowing costs in its upcoming meeting, marking a third consecutive pause in rate changes. Given the current state of inflation and the outlook for growth, the central bank seems more focused on the potential risks of inflation falling below the 2% target rather than the possibility of it exceeding that level. Market indicators suggest a strong consensus among investors that the deposit rate will remain at 2% through the end of the year.
In summary, the ECB’s current approach suggests a cautious stance, reflecting an awareness of both inflationary pressures and the need for economic stability within the Eurozone.