ECB Council assesses market resilience and evolving inflation outlook

The European Central Bank's Governing Council reviewed financial, economic, and monetary developments at its February 4-5, 2026 meeting. Discussions highlighted resilient financial markets despite geopolitical shocks and an evolving inflation outlook.

Markets shrug off geopolitical turbulence

Ms Schnabel reported that despite a spike in geopolitical and trade policy uncertainty since December 2025, financial market volatility remained contained and investor risk appetite largely unaffected, near its highest level since 2008.

This resilience was attributed to the continued strength of the global economy.

Recent US tariff threats, for instance, led to only short-lived corrections.

Investors hedged tail risks by reallocating towards precious metals and reducing US dollar exposures.

The euro appreciated 1% against the US dollar, but depreciated 0.3% in nominal effective terms, indicating dollar weakness.

The EUR/USD exchange rate decoupled from interest rate differentials, with dollar-negative risk shocks predominantly from the United States explaining most of the euro's appreciation.

Euro area equities outperformed the S&P 500, buoyed by a sharp rally in EU defence stocks, while tariff-sensitive sectors underperformed.

Overall, more favourable financial conditions were observed, driven by higher risk asset prices and lower real rates.

Inflation path and resilient euro area growth

Mr Lane reported that inflation should stabilise at the 2% target medium term.

HICP headline inflation declined to 1.7% in January, driven by energy price drops.

Non-energy inflation eased to 2.3%, and core inflation edged down to 2.2%.

Services inflation slowed to 3.2%.

Underlying inflation indicators remained consistent with the 2% target, with wage moderation expected (ECB tracker 2.4% in 2026, down from 3.2% in 2025).

Longer-term inflation expectations stood around 2%.

Global GDP growth was stronger than expected in Q3 and Q4 2025.

The euro area economy grew 0.3% in Q4 2025, mainly driven by services, with domestic demand expected to continue supporting growth.

Unemployment stood at 6.2% in December.

Calm before the storm or new normal?

The accounts reveal a central bank cautiously optimistic about market stability and inflation convergence, yet aware of underlying geopolitical and trade tensions.

The dollar's weakness, driven by US-specific risk shocks rather than monetary policy, highlights a shifting global financial landscape.

This suggests that while the immediate outlook is benign, external factors could quickly re-emerge as significant disruptors.