ECB holds rates but it’s not a ‘non-event,’ economists say. Here’s why

European Central Bank left policy rates unchanged on Thursday It is preparing for the fifth consecutive meeting with a key interest rate of 2%, in line with the bank’s target.

It seems like a non-event. Economists say not so.

“It would be wrong to describe the February meeting as an uneventful event. The environment is marked by high uncertainty and two-sided risks,” Deutsche Bank economists wrote in emailed research ahead of interest rate fixing. he said.

When considering what a rising euro exchange rate means for monetary policy, “understanding how the ECB thinks about risks is important to gauge the path for policy going forward.” they added.

“Nothing else has changed; the recent appreciation is disinflationary and strengthens undershooting of expected inflation. But the size of the impact depends on the circumstances.”

Appreciation of the currency tends to cause inflation to fall by making imported goods, raw materials, and energy cheaper, lowering production costs and consumer prices.

While this is good for businesses and consumers in the short term, central banks are wary of falling inflation and potential deflation in the long term as this could trigger an economic recession as consumers delay their purchases (in anticipation of prices falling further), while businesses could see lower incomes and increased real debt burdens.

Over the past month, euro It has strengthened 0.75% against the dollar and is up almost 14% over the past 12 months amid growing concerns about the unpredictability of U.S. economic policy. Some ECB policymakers express concern On the appreciation of the single currency against the US dollar and its possible depressing effect on the bank’s 2% inflation target.

“We are closely monitoring the appreciation of the euro and its possible effects on low inflation,” said Francois Villeroy de Galhau, Governor of the Bank of France. commented last week.

JP Morgan’s euro zone economist Greg Fuzesi said despite the red flags, it was not clear whether currency movements so far would be seen as too worrying.

“The ECB is looking at both the level of the currency, the pace of movement and whether any changes are likely to persist, and none of these seem overly troubling or clear in the context of an economy that has been resilient to a variety of pressures of late,” he said in emailed comments.

“Of course, all of this could change if growth indicators weaken and/or the currency strengthens further from here. But that is not the case right now.”

However, he said the ECB would likely signal a willingness to respond to shocks if necessary. “There are many issues that the Central Bank is monitoring in both directions, and uncertainty remains high, especially in geopolitics,” he said.

“But the point is that various uncertainties are causing disruption in both directions, and it’s not clear that currency movement alone is tilting them significantly downward.”

The ECB’s latest decision was in line with consensus forecasts. About 85% of economists survey was conducted A January survey by Reuters stated that the ECB would leave interest rates unchanged for the rest of 2026.

Deutsche Bank’s base case is for the ECB to keep interest rates at 2% until 2026, with the next move likely to be an increase in mid-2027. This “will be driven by risks of fiscal easing, tight labor markets and future inflation above target,” they said in an emailed analysis.

Meanwhile, it appears that risks are trending towards further easing this year.

“Ultimately, we think domestic inflation will outweigh the decline in external inflation; we are seeing evidence of fiscal easing starting to stimulate activity, but at the same time external risks have increased. The key data battle to watch is domestic conditions versus external conditions.”