As the Federal Reserve kicks off its rate-cutting cycle and market expectations for easing persist, the European Central Bank (ECB) maintained a prudent stance today, keeping its three key interest rates unchanged. The deposit facility rate at 2.00% and the main refinancing rate at 2.15% have remained stable since June 2025. Vice President Guindos clearly stated that current interest rates are at an “appropriate level,” and the slowing trend in services inflation is in line with expectations, supporting the continuation of existing policies.

The policy divergence between the U.S. and the EU continues to widen. The Federal Reserve lowered the federal funds rate to 3.50%-3.75% by the end of 2025, with markets expecting further easing space in 2026. In contrast, the ECB’s adherence to neutral interest rates has increased pressure on the euro to appreciate, thereby undermining the export competitiveness of the euro zone. The euro against the U.S. dollar fell 0.10% intraday to 1.1599, consolidating in the 1.16-1.17 range, with geopolitical risks and policy differences becoming the dominant factors driving exchange rates.

The ECB is also advancing balance sheet reduction, with approximately 40 billion euros in bond investments not being rolled over each month. Excess liquidity has dropped by more than one-third from its 2022 peak. Regarding economic expectations, euro zone inflation is projected to be 1.9% and economic growth 1.2% in 2026, a slowdown from 2025. However, consumers remain cautious about the short-term economic outlook; the expected 12-month economic growth turned negative to -1.3% in November 2025. Geopolitical events such as the Ukraine conflict and the escalation of the situation in Venezuela have also cast a shadow over the recovery.