Finance
Choppy markets threaten ECB's 'good place' but rates still firmly on hold
Published by Global Banking and Finance Review
Posted on February 4, 2026
4 min readLast updated: February 4, 2026
Quick Summary
The ECB is expected to maintain stable interest rates despite market volatility, with a focus on inflation and euro strength.
Market Volatility Poses Challenges for ECB's Stable Interest Rates
Market Conditions and ECB Policy
FRANKFURT, Feb 5 (Reuters) - The European Central Bank is all but certain to keep interest rates unchanged on Thursday and signal that no policy move is imminent, even if the euro's recent surge against the dollar fuels concerns that inflation might undershoot its target.
The euro zone's central bank has been on hold since ending a year-long run of rate cuts in June, and a benign outlook for both growth and prices has taken nearly all pressure off policymakers to provide any further support.
With inflation at the 2% target, growth steady at the currency bloc's potential and interest rates on a neutral setting, some have called the current period a central banker's nirvana or the ECB's "Goldilocks" moment.
Current Economic Environment
MESSY ENVIRONMENT THREATENS "GOOD PLACE"
That is why ECB President Christine Lagarde is likely to repeat her mantra that policy is in a "good place", with no debate over changing borrowing costs likely in the near term.
But last week's tumble in the U.S. dollar, volatility in commodity markets, the Trump administration's war of words over Greenland and its pressure on the Federal Reserve to cut rates, are all reminders that the situation could quickly change.
"It has been a tumultuous start to the year in terms of geopolitics and there have been some significant market moves," JPMorgan economist Greg Fuzesi said.
Thursday's meeting is the first since Bulgaria joined the bloc on January 1, taking the number of countries that share the euro currency to 21.
DOLLAR'S FALL NOT A PROBLEM YET
A strong euro relative to the dollar and other currencies lowers import costs, especially for energy, and curbs inflation at a time when it is already undershooting the ECB's target.
Inflation and Currency Impact
Inflation, the ECB's primary focus, slipped to 1.7% across the euro zone last month and could dip further before a forecast rebound next year, stirring memories of the ECB's struggle to rekindle price growth for the decade before the COVID pandemic.
But the move in the currency is not a deal-breaker for now.
"The recent jump in oil prices, if sustained, should offset much of the disinflation impact from a stronger euro, reducing the urgency for the ECB to adjust policy," Societe Generale's Anatoli Annenkov said.
"But over the medium term, higher oil prices combined with a stronger currency could sharpen concerns about competitiveness and growth, increasing pressure for monetary support," Annenkov added.
On a trade-weighted basis, the euro has moved little this year, reinforcing market expectations for no interest rate changes in 2026.
If anything, longer-term inflation expectations have been inching up, not down.
EUROPE HAS A COMPETITIVENESS PROBLEM
For now, Lagarde is likely to repeat that the ECB has no exchange rate target and that the euro's strength is merely one factor that impacts inflation.
She can also point to healthy economic growth figures, historically low unemployment and solid wage growth data to support a sanguine tone.
Future Outlook for ECB Policy
The euro zone has proven surprisingly resilient to trade strife as domestic consumption seems to be taking up the slack created by weak exports and poor industrial production.
Given exceptionally high domestic savings and a strong labour market, economists expect consumption to keep the bloc growing, with the German government's planned fiscal splurge on defence and infrastructure a further push to expansion.
"The path of monetary policy in 2026 will depend on who wins the contest between external conditions and internal conditions," Deutsche Bank said in an analysis. "Our baseline assumes that domestic resilience will dominate and that leads to (interest rate) hikes in 2027."
Risks could still go the other way, however, and if inflation is below target long enough to drag expectations below 2%, policymakers may have no choice but to provide more support.
(Writing by Balazs Koranyi; Editing by Catherine Evans)
Key Takeaways
- •ECB likely to keep interest rates unchanged despite market volatility.
- •Euro's strength against the dollar raises inflation concerns.
- •ECB's current policy is in a 'good place' according to Lagarde.
- •Domestic consumption supports euro zone growth despite trade issues.
- •Future ECB policy will depend on external vs. internal conditions.
Frequently Asked Questions about Choppy markets threaten ECB's 'good place' but rates still firmly on hold
1What is monetary policy?
Monetary policy refers to the actions taken by a central bank to manage the money supply and interest rates to achieve macroeconomic objectives such as controlling inflation and ensuring economic growth.
2What is inflation?
Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power. Central banks aim to maintain inflation at a target level to ensure economic stability.
3What is the European Central Bank (ECB)?
The European Central Bank (ECB) is the central bank for the eurozone, responsible for monetary policy, maintaining price stability, and overseeing the financial system of the euro area.
4What is financial stability?
Financial stability refers to a condition where the financial system operates effectively, with institutions that are resilient to shocks, ensuring the smooth functioning of financial markets and the economy.
5What is economic growth?
Economic growth is the increase in the production of goods and services in an economy over a period, typically measured by the rise in Gross Domestic Product (GDP).
