ECB Holds Rates (Dec 2025): Inflation Seen at 2% in Medium Term

Date: December 18, 2025

The ECB Governing Council kept all three key policy rates unchanged, reaffirming that inflation is expected to stabilise at the 2% target in the medium term. Updated Eurosystem staff projections show headline inflation easing below 2% in 2026–27 before returning to 2.0% in 2028, while growth forecasts were revised higher versus September, led by domestic demand.

Decision summary

Key ECB interest rates (unchanged)

• Deposit facility: 2.00%
• Main refinancing operations (MRO): 2.15%
• Marginal lending facility: 2.40%

Balance sheet: APP and PEPP runoff continues

• APP and PEPP portfolios are declining at a measured and predictable pace, as the Eurosystem no longer reinvests principal payments from maturing securities.

Updated staff projections

Inflation projections

Headline inflation (HICP):

• 2.1% (2025)
• 1.9% (2026)
• 1.8% (2027)
• 2.0% (2028)

Inflation excluding energy and food (core):

• 2.4% (2025)
• 2.2% (2026)
• 1.9% (2027)
• 2.0% (2028)

What changed vs prior projections:

Inflation was revised up for 2026, mainly because staff now expect services inflation to decline more slowly.

Growth projections

Growth was revised higher than September, especially on stronger domestic demand:

• 1.4% (2025)
• 1.2% (2026)
• 1.4% (2027)
• 1.4% (2028)

Policy reaction function: data-dependent, meeting-by-meeting

The Governing Council reiterated a clear framework:

Decisions will remain data-dependent and taken meeting-by-meeting.

Rate decisions will reflect:

• the inflation outlook and surrounding risks,
• incoming economic and financial data,
• dynamics of underlying inflation,

the strength of monetary policy transmission.

The ECB is not pre-committing to a particular rate path.

Backstops and market functioning

The ECB reiterated it can adjust all instruments within its mandate to ensure inflation stabilises at 2% and to preserve smooth transmission. It also highlighted:

• Transmission Protection Instrument (TPI) remains available to counter unwarranted, disorderly market dynamics that threaten transmission across euro area countries.

Market implications

EUR rates and curve

• Holding rates while projecting inflation converging to 2% supports a “higher-for-longer but flexible” interpretation: policy is restrictive enough to wait for confirmation, with no preset path.
• The services inflation reference is important: a slower decline tends to justify patience on easing.

FX (EUR)

• Near-term EUR direction typically hinges on whether incoming data validates the growth upgrade and how markets interpret the “meeting-by-meeting” stance relative to other central banks.

Spreads (periphery vs core)

• Continued APP/PEPP runoff keeps a gentle tightening bias in liquidity conditions, while the TPI serves as an explicit backstop against disorderly spread widening.

Trading view (scenario-based, no price levels)

Scenario 1: EUR supportive / risk-neutral

• Trigger: data confirm stronger domestic demand and services inflation remains sticky, pushing markets to price fewer or later cuts.
• Expression: EUR strength tends to show most clearly versus lower-yielding peers if rate differentials move in EUR’s favor.

Scenario 2: EUR soft / risk-sensitive

• Trigger: disinflation accelerates (including services) and growth momentum fades, leading markets to reprice toward earlier easing.
• Expression: range-to-downside tactics until the macro trend reasserts.

FAQ (featured-snippet friendly)

Did the ECB change interest rates on December 18, 2025?

No. The ECB kept the deposit facility at 2.00%, the MRO rate at 2.15%, and the marginal lending facility at 2.40%.

What does the ECB project for inflation?

Staff project headline inflation at 2.1% in 2025, 1.9% in 2026, 1.8% in 2027, and 2.0% in 2028.

Why was the 2026 inflation forecast revised up?

Mainly because staff expect services inflation to decline more slowly.