The European Central Bank (ECB) has recently released a tough signal. François Villeroy de Galhau, Governor of the Bank of France, clearly stated that there is zero tolerance for inflation “persistently below 2%”, breaking the market’s illusion of “tolerating slightly lower inflation”. Mārtiņš Kazāks, Governor of the Bank of Latvia, also stated that if inflation deviates significantly and persistently from the target, the central bank will take decisive action.

Currently, the ECB’s three key interest rates remain stable in the range of 2.00%-2.40%, with a cumulative interest rate cut of 200 basis points since June 2024. The latest forecast shows that inflation will be around 2.0% in 2025, but may drop to 1.6% in 2026 and only return to the target level in 2027. Market focus is on the quarterly forecast to be released in December, which will include the 2028 outlook for the first time and become a policy weather vane. If the forecast shows that inflation will remain low for a long time, expectations of interest rate cuts will heat up; if economic growth exceeds expectations, the central bank may maintain a wait-and-see attitude, and it is now at a policy crossroads.