MNI SOURCES: ECB Seen On Hold For Extended Period

European Central Bank policymakers think the deposit rate is likely to remain on hold for an extended period, Eurosystem sources told MNI, though they disagreed as to whether most Governing Council members expect a hike or a cut as the next move.

"There may be a growing block as seeing rates on hold for a considerable time, but I would clarify that statement by adding who knows then where we are in a year's time", one official said, adding that ECB President Christine Lagarde's reference to "full optionalities" perfectly captures the situation for the central bank.

December’s projections closed the window to further cuts in the short term, one official said, though he noted that growth was still seen as a concern despite the improved outlook and even as inflation risks appear completely balanced.

However, another official believes that upside inflation risks are being downplayed. Conditions in 12-18 months could be completely different, the official said, stressing extreme uncertainty.

The same official concurred in urging caution towards the improved growth outlook.

“Growth is better, but let's not get carried away yet and we are still hoping for a resurgent consumer,” he said, noting that much of the eurozone’s improved performance comes from a surge in demand for weight loss drugs which should continue in 2026. (See MNI INTERVIEW: ECB In Good Place But Not Complacent - Kazaks)

“The projections are based off a flat rate curve through 2027, even into 2028. There are no great inflationary pressures in that profile. In fact, both the currency and oil prices have moved in a more disinflationary way since the December round assumptions,” another official said, stressing that while risks are more balanced, they are still tilted to the downside for both growth and inflation.

Given that the ECB’s central scenario has raised the inflation outlook, with the projection for 2026 increased by 0.2 percentage points to 1.9%, it could be argued that some of the previous upside risks have materialised since the last projection round in September, another source noted.

NEXT MOVE

Officials disagreed in their assessments of the balance of views in the Governing Council regarding the likely direction of the next change to rates, something which all thought was a relatively distant prospect. The fact that the meeting saw no discussion at all over cutting or raising rates makes it difficult to tell, one official said. (See MNI INTERVIEW: ECB May Need To Raise Rates Next Year - Kocher)

He believed that the largest group on the Council see a hike as the most likely next move, but another official disagreed, saying that those who judge a hike more likely than cut are still a clear minority, and that none of the Governing Council’s “big beasts” are in that camp.

“'Those looking for a hike as the next move as a certainty remain in a very small minority,” he said, noting that the meeting finished unusually early on the Thursday, by 10 am Frankfurt time.

An ECB spokesperson declined to comment.