Euro area markets resilient, inflation expectations contained despite shocks
The European Central Bank's Governing Council noted continued market resilience to geopolitical uncertainty and contained inflation expectations at its February 2026 meeting. Despite recent turbulence, investor risk appetite remained largely unaffected, and the ECB is expected to keep rates unchanged.
Markets shrug off geopolitical turbulence
Ms Schnabel highlighted that geopolitical uncertainty had spiked since December 2025, yet market volatility remained low.
Investor risk appetite for the euro area and the United States stood near post-2008 highs.
This contained reaction was attributed to two factors: investors increasingly 'looking through the noise' of risk-off shocks, as seen with the short-lived corrections after the January 2026 Greenland tariff threat compared to the April 2025 US tariff announcement.
The second factor was the continued resilience of the global economy, with macroeconomic data surprising on the upside.
The euro appreciated 1% against the US dollar since December, driven by dollar weakness rather than euro strength, and largely decoupled from interest rate differentials.
Euro area-domiciled funds reduced US asset exposures, contributing to dollar depreciation.
Inflation outlook stable, policy rates unchanged
Mr Lane reported that euro area HICP inflation fixings, excluding tobacco, hovered around 1.8% for the second half of 2026, an upward revision since December due to higher oil and industrial metal prices.
HICP headline inflation declined to 1.7% in January from 2.0% in December, driven by energy.
Non-energy inflation eased to 2.3%.
Underlying inflation indicators remained consistent with the 2% medium-term target.
Negotiated wage growth was expected to ease to 2.4% in 2026, down from 3.2% in 2025, with longer-term inflation expectations around 2%.
The ECB was expected to keep policy rates unchanged in 2026 and possibly 2027, with a 25 basis point hike priced in only for early 2028.
Calm before the storm, or new normal?
This account paints a picture of surprising stability despite external shocks, suggesting a new level of market maturity or perhaps complacency.
While inflation appears contained and policy rates stable, the underlying geopolitical and trade tensions could quickly re-emerge as significant drivers.
The ECB's patient stance seems justified for now, but vigilance against tail risks remains paramount.