December ECB meeting: Still in “a good place,” with a focus on optionality

As expected, the European Central Bank (ECB) held policy rates steady today, extending its pause for a fourth straight meeting in the current easing cycle. Rates on the deposit facility, main refinancing operations, and the marginal lending facility remain at 2.00%, 2.15%, and 2.40%, respectively.

Economic activity has continued to grow, aided by fiscal spending and increased business capex. While ECB President Christine Lagarde reiterated that they remain in a very good place with policy, given this positive backdrop, she also noted that this place is “not static.”

Growth: Economic activity has been surprisingly resilient, reflecting strength in domestic consumption and investment. In particular, President Lagarde noted that growth in investment spending has been driven not only by the government sector, but also by the private business sector. While the former has been a given due to the positive fiscal policy backdrop, increased private business sector capex—even among SMEs—has likely been boosted by the surge in AI spending. While this could potentially signal a structural shift in the drivers of future growth, Lagarde tempered those expectations, noting that it remains too early to tell. Finally, exports also remained positive, despite the tariff environment.

Inflation: Inflation has been in a narrow range since the spring amid lower energy prices. While wage costs—a strong contributor to services inflation—have been firmer than expected, President Lagarde noted that forward-looking indicators suggest wages should moderate over the next year. Nevertheless, the inflation outlook has become more uncertain than usual, with the ECB also closely monitoring the effects of a potentially strong euro on inflation, which is already running below target.

The outlook has improved more positively since the last ECB staff projections in September. GDP growth in 2026 and 2027 was revised higher, while inflation is expected to remain below the ECB’s 2% target through 2027, before reaching its target in 2028.

President Lagarde noted that these upward revisions on growth were largely driven by expectations of better domestic demand, which should be the main engine of growth in the years ahead. Business investment and government spending should also increasingly underpin the economy. Meanwhile, the downward revisions to inflation were partly due to a deceleration in wages, along with subdued energy prices.