ECB maintains key rates, updates inflation and growth outlook

The European Central Bank's Governing Council decided to keep its three key interest rates unchanged at its December 18, 2025 meeting. The decision reconfirmed the expectation that inflation will stabilize at the 2 percent target in the medium term.

Inflation's path to 2 percent

The European Central Bank's Governing Council maintained its three key interest rates at its December 18, 2025 meeting, reaffirming its commitment to the 2 percent medium-term inflation target.

The latest Eurosystem staff macroeconomic projections for the euro area indicate headline inflation is expected to average 2.1 percent in 2025, then 1.9 percent in 2026, 1.8 percent in 2027, and 2.0 percent in 2028.

Core inflation is projected to average 2.4 percent in 2025, easing to 2.2 percent in 2026 and 1.9 percent in 2027, stabilizing at 2.0 percent in 2028.

Inflation for 2026 has been revised up due to a slower anticipated decline in services inflation.

Economic growth forecasts are stronger than in September, with GDP expected to grow by 1.4 percent in 2025, 1.2 percent in 2026, and 1.4 percent in both 2027 and 2028, driven by domestic demand.

Resilient economy, robust labor market

The euro area economy has demonstrated resilience, expanding by 0.3 percent in the third quarter of 2025, primarily fueled by stronger consumption and investment.

Services, particularly in information and communication, led this growth, a pattern anticipated to persist.

A robust labor market underpins this resilience, with unemployment at 6.4 percent in October 2025, near historical lows, and employment growing by 0.2 percent in the third quarter.

Domestic demand is expected to remain the primary growth driver, supported by rising real wages, employment, and additional government spending on infrastructure and defense, alongside improved financing conditions from earlier rate cuts.

Patience amidst persistent pressures

The ECB's decision to hold rates reflects a cautious optimism, acknowledging improved growth projections while inflation remains above target in the near term.

The emphasis on a data-dependent approach underscores ongoing uncertainty, particularly regarding services inflation and wage dynamics.

While economic resilience is noted, the path to the 2 percent target is not yet fully secured, necessitating continued vigilance.