Governing Council maintains 2 percent policy rate amid uncertainty
The Governing Council maintained its main policy interest rate at 2 percent for the fifth consecutive time this week. Despite a small undershoot, inflation remains in line with projections, necessitating a flexible approach.
Patience prevails despite inflation undershoot
For the fifth consecutive time since June 2025, the Governing Council maintained its main policy interest rate, the deposit facility rate, at 2 percent this week.
Euro area headline inflation registered 1.7 percent in January, a small undershoot, with core inflation at 2.2 percent.
Services inflation moderated to 3.2 percent from 3.4 percent in December, while energy prices fell 4.1 percent year-on-year.
Food inflation stood at 2.7 percent and goods inflation at 0.4 percent.
Despite the latest data, inflation remains in line with projections, consistent with achieving the 2 percent medium-term price stability goal.
However, the uncertain geopolitical environment necessitates flexibility.
The Council emphasized the importance of not pre-committing to an interest rate path, allowing it to respond to events that could cause inflation to deviate persistently from target in either direction.
This data-dependent approach prioritizes patience over immediate action, awaiting further hard data on wage growth for the first half of this year.
Euro area economy finds its footing
The euro area economy expanded by 0.3 percent in the fourth quarter of 2025, aligning with the previous quarter and slightly surpassing expectations.
This contributed to a 1.5 percent GDP growth for the full year 2025, a notable improvement from 0.9 percent in 2024. Spain demonstrated strong performance with 0.8 percent growth in Q4, and Germany also surprised positively with 0.3 percent quarter-on-quarter growth, partly driven by infrastructure and defence spending.
These figures suggest a small upside risk to the December projections of 1.2 percent growth in 2026. While the overall picture is one of moderate but steady expansion, indicating economic stabilization, growth remains historically anaemic.
Some manufacturing-heavy economies continue to struggle, highlighting a low level of potential growth.
Urgent reforms for a modern Europe
The euro area's anaemic potential growth, burdened by demographic shifts and weak productivity, demands immediate attention.
This underscores the critical need for comprehensive structural reforms, as advocated in the Draghi and Letta reports, to unlock Europe's economic potential.
Implementing proposals for a deeper single market, a robust savings and investment union, and regulatory simplification is essential for building a resilient and innovative future economy.