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At its February meeting, the European Central Bank (ECB) once again voted to keep rates on hold. The unanimous decision signalled it sees little change to the eurozone’s economic outlook. German fiscal spending will keep the economy ticking along, but to what extent this disappoints or is offset by tariffs is yet to be seen. Coupled with the risk of further dollar depreciation or more tariffs, this means we think the risks are tilted towards a further cut. But, for now our base case is that the ECB will be on hold throughout 2026.
Unchanged eurozone economic outlook signals rate hold
The ECB Governing Council’s guidance reconfirmed that global trade policy remains a key source of uncertainty. It also continued to highlight how increased defence spending, healthy private-sector balance sheets and past rate cuts will all underpin steady growth in the eurozone this year.
Since the ECB’s last meeting, growth surprised to the upside with the eurozone growing by 0.3% in Q4, which was above the ECB’s 0.2% forecast. Inflation also dipped to 1.7% in January after already coming in below the ECB’s Q4 forecast.
Lower inflation, stronger growth and survey data holding firm in January − despite President Trump’s threats of further tariffs on the bloc − means the economy continues to be in a “good place”, as ECB President Lagarde has repeatedly emphasised.
All of this continues to suggest that the baseline for this year is steady rates, unless there’s a deterioration in the economy or a sharp rise in global commodity prices.
Risks remain skewed to further ECB rate easing
Looking ahead, there’s a couple of reasons we think the risks are still skewed towards further easing.
First, if the dollar continues to weaken, then cheaper import prices and less competitive exports could prompt a more severe undershoot in inflation. This would require additional rate cuts to offset the impact of a stronger euro. However, President Lagarde brushed aside comments about currency appreciation at February’s ECB press conference, emphasising that “the dollar has depreciated measurably against the euro, but not in the last few days, but since March 2025”. Indeed, the euro is little changed on a trade-weighted basis since the ECB’s December forecast, so will have little bearing on the Governing Council’s thinking.
Second, Germany’s fiscal stimulus will provide a tailwind to growth in Europe’s largest economy, but just how large this impact will be remains somewhat unclear. We think there’s a chance that Germany’s fiscal splurge disappoints, or at least will be partially offset by the continued impact of tariffs and a strong euro on the already-struggling manufacturing sector. Admittedly, factory orders in Germany have been surging of late and are currently up 12.6% y/y, but we await further data to see if a genuine manufacturing recovery is underway in Europe’s largest economy.
For Ireland, inflation is now falling back after rising sharply at the end of last year. However, we think inflation will stabilise a little above 2% as expansionary fiscal policy, supply-side constraints and a relatively tight labour market continue to prop up growth.
All told, we expect the ECB to keep rates on hold in 2026. However, the risks continue to be skewed towards further easing in the near-term, especially if German defence spending ends up disappointing.
