ECB Maintains Interest Rates, Confident in Market Predictions

ECB's Current Stance on Interest Rates

FRANKFURT, Jan 22 (Reuters) - European Central Bank policymakers are in no hurry to adjust interest rates as inflation is hovering near target and they appear comfortable with investor bets for steady rates all through 2026, the accounts of their December meeting showed on Thursday.

The ECB left its interest rate unchanged at 2% at the December 17-18 meeting and lifted growth projections, taken by markets as a signal that the bar for any policy easing was exceptionally high.

Speaking since the meeting, the central bank's chief economist Philip Lane has said that as long as the economy develops as projected, interest rate changes are unlikely to be on the agenda in the near term. This confirmed market bets that the ECB would be on hold for some time after eight rate cuts in the year to last June.

Market Reactions and Predictions

"The Governing Council could be patient, although this should not be mistaken for being hesitant to act or being asymmetric," the ECB said in the accounts. "Overall, the ECB was currently in a good place from a monetary policy point of view, but this did not mean the stance was to be seen as static," it said.

Highlighting the exceptional uncertainty of novel risks like the AI boom, U.S. tariffs, Chinese dumping, "some" policymakers thought risks were skewed towards inflation undershooting the target while a "few" feared overshooting.

This meant that even the direction of the next ECB move, whenever it came, was uncertain.

"It was important not to give the impression that the next move would be in one direction or the other, or to suggest any tightening or easing bias," the bank said.

The ECB will next meet on February 5 and financial investors see no change in interest rates at all this year.

While policymakers rarely comment on such pricing, the accounts suggested they were quite comfortable with current bets, as long as the outlook held.

"Given the Governing Council’s medium-term orientation... the current market pricing of interest rates was seen as consistent with the latest fixings and in line with the Governing Council’s reaction function," the ECB added.

Although new U.S. tariffs would materially change the outlook, market expectations did not move much over the past week when U.S. President Donald Trump threatened European allies with fresh duties.

This appears to confirm bets that trade barriers do not have a material outlook for prices, at least not until there are major retaliatory moves.

Inflation Trends and Projections

Inflation, the ECB's main focus, has been hovering on either side of the 2% target for most of the past year and projections show it near this level for years to come.

There may be some modest undershooting this year on lower energy prices but domestic inflation remains relatively high due to robust wage growth, supporting arguments that price growth will rebound back to target once lower energy costs get knocked out of base figures over time.

(Reporting by Balazs Koranyi and Francesco Canepa; Editing by Toby Chopra)