The ECB's December 2025 decision signals confidence without complacency. By holding rates steady, the Governing Council is effectively declaring that policy is now in a wait-and-watch phase, where the direction of travel matters less than the evidence confirming arrival at price stability. Inflation is projected to settle close to the 2 percent target over the medium term, even as services inflation proves more stubborn than previously expected. This persistence explains the upward revision to inflation in 2026 and reinforces the ECB's caution.

At the same time, the growth outlook has quietly improved. Stronger domestic demand has lifted projections across the horizon, suggesting the euro area economy is coping with restrictive policy better than feared. This resilience gives the ECB room to remain patient, allowing monetary transmission to continue working through credit, demand, and pricing channels.

Crucially, the ECB is resisting any temptation to pre-commit. Its emphasis on data dependence and meeting-by-meeting judgement reflects an awareness that the final leg of disinflation is often the most fragile. Balance sheet runoff continues steadily, while backstop tools remain in place to prevent market fragmentation. In essence, stability is within reach, but policy discipline, not premature easing, will determine whether it is secured.

Forecasters see the ECB keeping rates on hold through 2026.

The European Central Bank (ECB) sets monetary policy for all members of the Eurozone. The highest decision-making body is the Governing Council which comprises the six members of the Executive Board and the 20 presidents of member central banks. Policy meetings take place roughly every six weeks but, due to the sheer number of participants, a rotation system has been introduced so that the total number of votes is capped at twenty-one. The benchmark interest rate is the rate on the main refinancing operations (refi rate) which sits between the marginal lending facility rate and deposit rate. The ECB's primary objective is price stability which since July 2021 is based upon a symmetric 2 percent target for the annual inflation rate.

The European Central Bank determines interest rate policy at their Governing Council meetings. The Council is composed of the six members of the Executive Council and 17 presidents of member central banks (Bank of France, Bundesbank, etc). The Governing Council meets now meets every six weeks. The European Central Bank had an established inflation ceiling of just less than 2 percent which was modified in July 2021 to 2 percent. The ECB's measure of inflation is the harmonized index of consumer prices (HICP). Each member of the Governing Council has one vote and decisions are reached by simple majority. In the event of a tie, the President has the casting vote. Only short-form minutes are released so how individual members voted is not known.

As in the United States, European market participants speculate about the possibility of an interest rate change at these meetings. If the outcome is different from expectations, the impact on European markets can be dramatic and far-reaching. The rate set by the ECB serves as a benchmark for all other interest rates in the Eurozone.

The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the stock market, while lower interest rates are bullish.