On December 19, the European Central Bank announced that it would keep the three key interest rates unchanged for the fourth consecutive time. The refinancing rate remained at 4.5%, the deposit facility rate at 4.0%, and the marginal lending rate at 4.75%, in line with general market expectations. At the press conference, President Lagarde emphasized that there is no discussion on interest rate hikes or cuts at present, all policy options are on the table, and reaffirmed that inflation will return to the 2% target in the medium term, releasing a signal of cautious wait-and-see.
Behind the European Central Bank’s inaction is the contradiction between the sluggish economic recovery in the euro zone and the slow decline of inflation. The European Central Bank predicts that the euro zone’s GDP growth rate will be 1.4% and the inflation rate will be 2.1% in 2025. Economic growth momentum is insufficient. Manufacturing in core countries such as Germany and France remains sluggish. Germany’s manufacturing PMI in November was only 42.6, and France’s was 42.9, both in the contraction range. In terms of inflation, the euro zone’s CPI rose by 2.4% year-on-year in November. Although it has dropped significantly from the peak, core inflation is still sticky, and there is great pressure on service price increases.
The market reaction was stable. Germany’s DAX Index rose 1% to 24201.32 points, and France’s CAC40 Index rose 0.9% to 8158.93 points. The euro rose slightly by 0.1% against the US dollar to 1.0980. For enterprises, the continuous high interest rate environment increases financing costs, and the euro zone’s small and medium-sized enterprise loan demand index has been at a low level for 5 consecutive months. Analysts believe that the European Central Bank may start the interest rate cut cycle in the second quarter of 2026, but the specific time still depends on inflation data. In addition, Germany announced on the same day that it would raise the bond issuance scale next year to 512 billion euros to inject funds into infrastructure and national defense. This move may play a certain role in boosting the euro zone economy.
