The European Central Bank did not reduce interest rates for the second meeting in a row. This is probably the final end of the cycle of monetary policy easing in the euro zone. Although in the case of central bankers you can never be sure of anything.
– The Governing Council decided today leave the three key ECB interest rates unchanged. Inflation is currently close to the medium-term target of 2% and the Governing Council’s assessment of the inflation outlook has remained essentially unchanged, we read in the October statement of the European Central Bank.
The deposit rate – which has been the key interest rate at the ECB for some time – remained unchanged at 2.00%. The rate of main refinancing operations was also not changed, which is 2,15%as well as the loan rate of 2,40%.
This was the third decision in a row to keep interest rates unchanged. The Governing Council delivered the same verdict in July as well as in September. The July decision was the first of its kind after eight cuts in a row as part of the monetary policy easing cycle that started in 2024.
How the ECB loosened its monetary policy
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In June 2024, a decision was made to reduce interest rates in the euro zone for the first time since 2019. Previously, ECB rates were kept at the highest levels since 2001 for nine months. The total scale of these reductions amounted to 200 basis points. in the case of the deposit rate and 235 bps. in the case of the refinancing operation rate.
The previous reduction in borrowing costs at the ECB took place in June. Previously, the ECB cut rates at its meetings in April, March and at the end of January. In mid-December, the Governing Council also reduced borrowing costs by 25 basis points. In October, the ECB decided to cut rates by 25 basis points, and in September it also reduced the deposit rate by 25 basis points, while reducing the reference rate by as much as 60 basis points.
As a result, ECB rates have practically equaled HIPC inflation over the last 12 months. Preliminary Eurostat data show that the harmonized index of consumer prices (HICP) in the euro area in September 2025 was 2.2% higher than a year earlier. So this means resetting real interest rates in the Eurozone.
As part of the September inflation projection, ECB economists assumed that HICP inflation would average 2.1% in 2025, 1.7% in 2026 and 1.9% in 2027. Inflation excluding energy and food prices was predicted by experts to average 2.4% in 2025, 1.9% in 2026 and 1.8% in 2027.
The end of the cycle is probable, but not certain
The October decision of the Governing Council was not a surprise to economists and market participants. The former unanimously announced no changes in interest rates at the ECB. The last voices about a possible further reduction appeared in July.
– The Governing Council remains committed to ensuring that inflation stabilizes at the target level of 2% over the medium term. The Governing Council will determine the appropriate monetary policy stance on a data-driven basis, from meeting to meeting, as is customary, the ECB statement added.
The tone of recent statements by ECB President Crisitine Lagarde also spoke in favor of ending the cycle of interest rate cuts in the Eurozone. – The disinflation process in the euro zone has ended. What I mean here are the reasons for the increase in inflation that we have seen in recent quarters. We’re still in a good place. Inflation is where we want it to be. The domestic economy is resilient, the labor market is in solid condition and the risk balance is more balanced, said the head of the ECB in September.
– However, this does not mean that monetary policy is on a predetermined path. We will make decisions from meeting to meeting, said President Lagarde as usual. She also added that a slight change in inflation from 2%. target will not immediately mean a reaction from the ECB.
However, Bank of America economists have a slightly different opinion on this matter. – Financial conditions have become significantly more restrictive. The ECB will have a problem avoiding their reflection in its December inflation forecasts, economists from the American bank believe. ECB chief economist Philip Lane also recently mentioned the risk of “undershooting” inflation, suggesting the option of a “slightly lower” interest rate. Hence, the futures market estimates the chances of another 25-point reduction in ECB rates by June 2026 at 40-50%.
Despite this, the vast majority of economists point to the risk of inflation exceeding the ECB’s 2% target. They point to the recovery in the German service sector and the fiscal stimulus measures ordered by the government in Berlin that will soon come into force. Increased spending of borrowed money by the German government may raise both GDP and inflation in 2026.
European QT remains unchanged
In parallel to interest rate cuts, the ECB is pursuing a policy of “quantitative tightening” (QT) of monetary conditions. Under QT, the APP portfolio is reduced at a specific and predictable rate because the Eurosystem no longer reinvests capital repayments on maturing securities. As of July 2023, the Governing Council has stopped reinvestment under the APP program.
The APP and PEPP portfolios are being reduced at a specific and predictable pace as the Eurosystem is no longer reinvesting capital repayments on maturing securities, it said. The ECB stopped reinvestment under the PEPP program at the end of 2024.
The last of the planned decision-making meetings of the Governing Council in 2025 will be held on December 17-18
Lagarde: Euro zone industry is struggling with high tariffs, uncertainty, strong euro
Monetary policy in the euro zone is in a good place, ECB President Christine Lagarde said on Thursday at a conference after the ECB meeting. Lagarde added that core inflation rates remain in line with the ECB’s target.
“From a monetary policy perspective, we are in a good place. It is not predetermined, but we will do whatever it takes to make sure we stay in that good place,” Lagarde said.
“Considering that GDP growth in Q3 was higher than expected, I would not complain too much about the level of GDP growth. However, we hope that it will be better,” she added.
Lagarde indicated that the decision on interest rates was made unanimously.
She informed that core inflation rates in the euro zone were within the target range.
“While corporate profits are rising, labor costs are expected to fall further thanks to rising productivity and slowing wage growth. Forward-looking indicators, such as the ECB Wage Index and Wage Expectations Surveys, point to slower wage growth in the remainder of the year and the first half of 2026. Most measures of long-term inflation expectations remain around 2%, which supports inflation stabilizing around our target,” said the Chairwoman of the ECB Governing Council.
In the opinion of the ECB president, the full impact of tariffs on the economy will be visible over time.
“The global economic environment is likely to remain depressed. Exports of goods fell from March to August, reversing the earlier trend of increasing international trade before the recent tariff increases. New export orders in the manufacturing sector point to further declines. The full impact of higher tariffs on exports and investment in the euro area manufacturing sector will only become apparent over time,” Lagarde said.
In Lagarde’s opinion, some risks to euro zone GDP growth have been mitigated.
“The summer trade agreement between the EU and the US, the recently announced ceasefire in the Middle East and today’s announcement of progress in trade negotiations between the US and China have alleviated some of the risks to economic growth. At the same time, the still volatile global trade environment could disrupt supply chains, further weaken exports and negatively impact consumption and investment. Deteriorating sentiment in financial markets could lead to tighter financing conditions, increased risk aversion and weakened economic growth. Geopolitical tensions, in particular Russia’s unjustified war with Ukraine remain the main source of uncertainty,” Lagarde said.
“On the other hand, higher than expected defense and infrastructure spending, together with productivity-enhancing reforms, will contribute to economic growth. Improved business confidence could stimulate private investment. Sentiment could also improve and economic activity recover if remaining geopolitical tensions ease or if remaining trade disputes are resolved more quickly than expected,” she added.
Lagarde drew attention to the risk of rising inflation.
“The outlook for inflation remains more uncertain than usual due to the still volatile global political environment. A stronger euro could reduce inflation more than expected. Moreover, inflation could turn out to be lower if higher tariffs led to a decline in demand for euro area exports and prompted countries with excess capacity to further increase exports to the euro area. Increased volatility and risk aversion in financial markets could impact domestic demand and therefore lower inflation,” she said.
“On the other hand, inflation could turn out to be higher if the fragmentation of global supply chains raises import prices, reduces the supply of key raw materials and deepens production capacity constraints in the domestic economy. Increased spending on defense and infrastructure could also raise inflation in the medium term. Extreme weather events, and more broadly – the growing climate and natural crisis, may cause food prices to increase more than expected,” she added.
The Chairwoman of the ECB Governing Council announced that there was agreement during the meeting on the risk factors facing the euro area economy.
“There was a discussion on the balance of risks within the Council of Governors of the ECB, as usual, but we all agreed on the list of risk factors mentioned in the statement. High uncertainty remains and many of these risks result from policies and their implementation. We are therefore not saying that the balance is tilted one way or the other, but we prefer to list all the risk factors one by one,” Lagarde said.
According to the president of the ECB, the euro zone industry is struggling with high customs duties, uncertainty and a strong euro.
“The services sector is growing thanks to strong tourism and especially the growth of digital services. Reports indicate that many companies are modernizing their technological infrastructure and implementing AI in their operations. The industry is experiencing problems from high tariffs, still high uncertainty and the strengthening of the euro,” Lagarde said.
“The divergence between domestic and external demand is expected to persist in the near term. The economy should continue to benefit from consumer spending while real wages rise,” she added.
