The European Central Bank left its key interest rate unchanged at 2 percent on Thursday, with the euro area economy still proving itself resilient and with inflation reasonably steady around the Bank’s target. The decision was consistent with guidance from policymakers that monetary policy is in “a good place,” giving them room to wait for year-end projections that will include the ECB’s first inflation forecast for 2028. The economy grew a faster-than-expected 0.2 percent in the third quarter of this year, while preliminary data showed inflation ticking up to 2.2 percent in October, calming fears about a possible undershoot. “The economy has continued to grow despite the challenging global environment,” the ECB said in its statement. “The robust labor market, solid private sector balance sheets and the Governing Council’s past interest rate cuts remain important sources of resilience.” At the same time, however, the ECB warned that “the outlook is still uncertain, owing particularly to ongoing global trade disputes and geopolitical tensions.” Risks remain abundant: beyond potential delayed effects from new U.S. tariffs, they include a further strengthening of the euro, as the U.S. Federal Reserve continues to lower its own rates. On Wednesday, the Fed cut rates by another quarter-point — the second consecutive reduction — citing a slowdown in job growth. Domestically, a delay to Germany’s fiscal stimulus measures and France’s ongoing budget crisis could also threaten to push the ECB out of its “good place.” Even so, a growing number of economists believe the central bank has reached the end of its easing cycle, a recent Reuters survey showed. While a slim majority of analysts last month expected one more rate cut before the end of 2026, nearly 60 percent now anticipate no further changes to borrowing costs in the current cycle.

The European Commission is considering tying pension reform to cash payouts from the EU’s next €2 trillion budget as it attempts to protect member countries’ finances from a looming demographic crisis. Three EU senior officials told POLITICO that the EU executive’s economic and finance legislative arms are looking into buttressing countries’ creaking state pension systems by recommending retirement savings policies to individual countries. If EU capitals ignore these country-specific recommendations, or CSRs, then they might not get their full share of the EU’s seven-year budget from 2028. “Our job in the Commission is to help countries do the difficult stuff,” said a senior Commission official, who, like others quoted in this story, spoke on the condition of anonymity to speak freely. “CSRs would be well suited to do it” by “linking reforms to investment.” The EU faces a toxic cocktail of high debt, an aging population and declining birthrates. Combined, they will cripple any public “pay-as-you-go” pension system that relies on taxpayers to provide retirees with a source of income. That’s a problem today as well as tomorrow. Over 80 percent of EU pensioners relied on a state pension as their only source of income in 2023. That overreliance has left one in five EU citizens above the age of 65 at risk of poverty, the equivalent of 18.5 million people. Brussels’ goal is twofold: Alleviate the pressure on the state coffers to keep pensioners afloat, and help create a U.S.-style capital market by putting people’s long-term savings to work. The idea, while well-intended, would be politically difficult and has deputy finance ministers wincing at the thought. Pension policy lies well outside of the EU executive arm’s legal reach. Even then, the risks of tying EU funds to politically toxic issues could spell disaster for governments, especially when democracy’s most loyal participants are above the age of 50. “You can’t buy pension reform,” said a deputy finance minister. “It’s going to hit the nerve of what democracy is about.” Over 80 percent of EU pensioners relied on a state pension as their only source of income in 2023. | Dumitru Doru/EPA Pension reform also has a habit of bringing protesters onto the streets. In Brussels, police clashed with trade unions on Tuesday, who were demonstrating over austerity measures that include raising the age of retirement from 65 to 67 by 2030. Belgium got off lightly when compared to France, which witnessed months of protests in 2023 when President Emmanuel Macron raised the retirement age from 62 to 64. Even then, France’s recently reinstated prime minister, Sébastien Lecornu, announced Tuesday that he’d put Macron’s pensions reforms on ice to overcome a parliamentary crisis that’s made it impossible to pass a budget. Postponing the reforms could cost Paris up to €400 million next year at a time when the government tries to tighten its belt and reduce the country’s ballooning debt burden. The Commission’s focus would stop short of setting retirement age or mandating monthly payouts to pensioners. Brussels’ reform plans instead home in on incentivizing citizens to save for retirement and encouraging companies to offer corporate pension plans to employees. CSRs are part of an annual fiscal surveillance exercise that the Commission uses to coordinate economic policies across the bloc. These recommendations are negotiated with EU capitals in a bid to fix a country’s most pressing economic problems. The Commission doesn’t consider this coercion, just sound economics. “If it’s on pensions, then so be it,” a second senior Commission official said. POST-PANDEMIC CARROTS AND STICKS EU capitals have had a habit of ignoring CSRs in the past. That could change if the Commission adds cash incentives, an idea that was born out of the EU’s €800 billion post-pandemic recovery fund. The Commission also saw an opportunity to incentivize governments to enforce costly reforms to modernize the bloc’s economy by setting targets that’d unlock EU funds in tranches. For countries like Spain, these included pension reform. The carrot and stick strategy proved such a hit within the Berlaymont that it wants to use the same system in the next EU budget, especially if it helps add teeth to CSRs. Not everyone’s a fan. The mountains of paperwork that governments had to amass to prove they’d met the Commission’s demands slowed progress, leaving hundreds of billions of euros on the table. “We don’t know why the Commission is so fond of this model,” said another deputy finance minister, who poured cold water on the idea. “[Pension reform is] hugely controversial. I highly doubt anyone’ll do it.” Giorgio Leali contributed reporting from Paris.

France’s fiscal troubles will present European Central Bank President Christine Lagarde with a particularly sensitive challenge at her regular press conference on Thursday. Aside from the Governing Council’s latest decisions, the former French finance minister will have to field awkward questions about the situation in her homeland. She faces a tricky balancing act, and will have to avoid suggesting that the ECB may “bail out an unrepentant fiscal sinner” while also taking care not to unsettle bond markets that are still giving France “the benefit of the doubt,” said Berenberg Bank chief economist Holger Schmieding. The Bank is overwhelmingly expected to keep its deposit rate at 2 percent again on the basis of new forecasts showing continued expectations of modest growth. Markets see any further rate cuts as unlikely and think rates will begin to rise again in early 2027. Lagarde will need to manage expectations carefully, HSBC economist Fabio Balboni warned, since ruling cuts out completely could drive up borrowing costs across the eurozone, including in France. “Many countries in Europe face tough fiscal challenges, especially France,” Balboni said. “They simply can’t afford” to spend more money just on interest payments. The situation Balboni describes is something economists call “fiscal dominance,” which occurs when the central bank is forced to keep interest rates low so governments can continue to borrow. Such intervention generally leads to higher inflation in short order. It was debt problems, more than anything else, that brought down France’s government on Monday, after Prime Minister François Bayrou failed to garner enough support for €44 billion in proposed budget cuts for next year. But after initially taking fright when Bayrou called his fateful vote of confidence, investors have largely held their nerve. The spread between French and German 10-year bond yields, a bellwether of market stress, is now at 0.82 percentage points, the widest it’s been all year. But it continues to resemble a slow puncture more than a blow-up. That’s partly because President Emmanuel Macron, who has appointed yet another centrist prime minister, is still trying to build consensus around a deficit reduction plan, rather than call new elections. C’EST LA VIE It has been a humbling summer for France, which has always benchmarked its economic and financial strength against Germany. But as its politics have become increasingly paralyzed and its debts have mounted, markets have come to see it more as a peer of Italy. For the first time this century, Paris’ borrowing costs surpassed those of Rome on Tuesday, albeit only briefly and due to a technical quirk. But the fear is that a growing public debt burden — which stands at over €3.35 trillion — will make the country increasingly vulnerable to a financial crisis. Under Lagarde, the ECB has given itself the power to intervene in bond markets if it feels that unjustified volatility is stopping its interest rates from working as intended, something it calls the transmission mechanism of monetary policy. It drew up the rules for using what it calls the “Transmission Protection Instrument” during the pandemic in 2022, the last time investors were seriously spooked by the size of eurozone budget deficits. Most analysts, such as Swiss Re’s Patrick Saner and UniCredit’s Marco Valli, say the current situation isn’t anywhere near serious enough to justify using the TPI. There is no certainty, however, because the criteria for intervening through the TPI are deliberately vague, giving the ECB full discretion over when and how to use it. On paper, at least, the TPI allows the ECB to buy unlimited amounts of a eurozone country’s bonds from investors, provided that market stress is “unwarranted;” that doing so would not risk stoking inflation; and that the country is not under an EU excessive deficit procedure. Hawks such as the ECB’s head of markets, Isabel Schnabel, have argued that talk of using the TPI today is “far-fetched” insofar as Paris’ problems have no “wider implications for the euro.” | Horacio Villalobos Corbis/Corbis via Getty Images The last criterion would exclude France, but policymakers were careful not to tie their hands, saying these criteria would only serve as “an input” to the decision-making process. It’s anyone’s guess where the ECB’s pain threshold might be. Hawks such as the ECB’s head of markets, Isabel Schnabel, have argued that talk of using the TPI today is “far-fetched” insofar as Paris’ problems have no “wider implications for the euro.” “It would be difficult for the ECB — at least in terms of building a majority at the Governing Council — to use its new arsenal if there is no spillover effect from the country under pressure” to others in the eurozone, AXA group chief economist Gilles Moëc agreed. Moreover, there is no sign yet that bond market conditions are really hurting growth: The Bank of France on Tuesday estimated that the French economy will grow by a respectable 0.3 percent in the current quarter. However, the fear of bond markets suddenly getting out of control runs deep. Last year, Italian central bank chief Fabio Panetta said the ECB should be “prepared to deal with the consequences” of shocks caused by “an increase in political uncertainty within countries,” much as France is currently enduring. Talk of spreads is particularly sensitive for Lagarde, whose cavalier comment during the pandemic that the ECB “is not here to close the spreads” briefly threw markets into a panic. As Raboresearch economist Bas Van Geffen said: “She will not make that mistake again.” The ECB president appeared to try to strike a balance last week in an interview with Radio Classique, saying she was watching the spreads “very closely” while urging Paris to “get organized … and put your public finances in order.”

The European Central Bank cut its key deposit rate by another quarter-point to 2 percent, as fading inflation gives it the freedom to support an economy burdened by U.S. President Donald Trump’s trade war. The cut had been almost universally expected, after policy-makers signalled ahead of time that they would remain on an easing path that has seen them cut rates eight times in the last year. “Most measures of underlying inflation suggest that inflation will settle at around the Governing Council’s 2 percent medium-term target on a sustained basis,” the ECB said in a statement while warning of “exceptional uncertainty.” Taking down interest rates to a level at which they are longer hold back economic activity was easy enough, at a time when unpredictable U.S. policies and a war raging on the currency union’s borders were casting a long shadow. From here on, however, decisions will get much harder, economists warned, given that some disruption of global supply chains is becoming more likely as the trade war drags on. The ECB’s staff cut their inflation forecasts for 2025 to show it right at the 2 percent target, down from 2.3 percent three months ago. Staff now expect it to dip to 1.6 percent in 2026 before returning to 2 percent in 2027. The growth outlook has remained largely unchanged, with forecasts of 0.9 percent next year, 1.1 percent in 2026 and 1.3 percent in 2027. But as JPMorgan economist Greg Fuzesi sees it, the forecasts should be seen as “work in progress given the huge uncertainty over U.S. trade policy and the limited clarity so far on fiscal policy in Germany and the rest of the region.” Germany’s new government has indicated it will try to cushion the shock from the trade war with new debt-financed programs to boost domestic infrastructure and defense spending. While recent data have suggested this is starting to support activity, most analysts expect them to take time before having a meaningful impact on growth. Further complicating the ECB’s task is that the current economic weakness may push inflation down below target in the near-term while a fiscal spending boost and possible tariffs could push up prices down the line. Given the lag with which monetary policy works, setting the right policy at the right time may prove exceptionally challenging. While most analysts expect more interest rate cuts later in the year, the timing and scope remains uncertain. The policy statement offered little guidance, simply affirming “especially in current conditions of exceptional uncertainty, it will follow a data-dependent and meeting-by-meeting approach” and “is not pre-committing to a particular rate path.” Financial markets will be closely monitoring the press conference of ECB President Christine Lagarde — who may have to face questions regarding her own future as well as the Bank’s — at 14:45 CET.

The European Central Bank cut its key interest rates by a quarter-point, as greater confidence that inflation is beaten gives it more space to support an economy threatened by a growing array of risks. The move takes the Bank’s key deposit rate down to 2.75 percent, from a record high of 4 percent last year, and President Christine Lagarde indicated the bank expects further cuts will help to revive growth in a eurozone economy that stagnated at the end of last year, its two largest economies — Germany and France — weighed on by political instability.  For the immediate future, however, it expects the economy to stay weak, not least because its past interest rate hikes in 2022 and 2023 continue to act as a drag: companies and home-owners who took out long-term loans in the days when interest rates were close to zero are still having to refinance those loans at higher levels, forcing them to cut back on other outgoings.  Moreover, it says the risks to its outlook are still skewed negatively, not least due to the new administration in the U.S. and President Donald Trump’s threats of trade tariffs.  CONFIDENCE SAPPED The political environment, both external and domestic, has sapped confidence over the past year, diminishing the impact of four previous cuts that had brought official rates down by a full percentage point. The Bank noted that even though household incomes are more than keeping pace with inflation, people “have not yet drawn sufficient encouragement … to significantly increase their spending.”  “The ECB is clinging on to the optimism that falling rates and rising real wages will translate into a rebound in private consumption, but as we have seen … the confidence to spend them just isn’t there,” Kyle Chapman, a foreign exchange analyst with Ballinger Group, said in e-mailed comments.  “The recovery has been repeatedly delayed, and it is hard to imagine that this turns around in the near term.”  Several members of the ECB’s Governing Council have already voiced such fears, stressing that the ECB should cut rates to a “neutral” level as quickly as possible. Deutsche Bank’s Mark Wall said in e-mailed comments that rates may “quite probably” end up below neutral by year-end.  For the moment, Lagarde said, policy is still “restrictive”, adding that no-one had suggested otherwise at Thursday’s meeting. ECB staff estimate the neutral rate could be anywhere between 1.7 and 2.5 percent.    “The lack of discussion around neutral rates implies that at least two or three more cuts are locked in in policymakers’ minds,” Chapman said.   Lagarde declined to be drawn on how far the ECB still needs to cut to get to a neutral stance, and stuck to the guidance that the Bank “will follow a data-dependent and meeting-by-meeting approach.”  The ECB’s step widens the gap between European and U.S. interest rates: the U.S. Federal Reserve on Wednesday kept the target federal funds rate unchanged at 4.25 – 4.5 percent. That widening gap may put further downward pressure on the euro, at least partially compensating for any tariff effect but pushing up the price of key imports, including energy. This could be further exacerbated if Europe decided to retaliate against possible U.S. tariffs. Reports on Monday suggested that Treasury Secretary Scott Bessent is preparing a 2.5 percent universal tariff, with incremental monthly increases up to 20 percent that would squeeze European exporters more and more tightly. Lagarde said it would be months before the ECB can reliably assess what Trump’s policies mean for Europe.  “There are rumors, there are statements, there are assumptions, but we don’t have anything that is, you know, clear and tangible,” she said.  

The European Central Bank is expected to cut interest rates this Thursday and hint at further easing ahead as policymakers, together with the rest of the world, try to process the implications of U.S. President Donald Trump’s policies for growth. The ECB is universally expected to cut the key deposit rate by a quarter-point to 2.75 percent on Thursday, and some Governing Council members have signaled they want it as low as 2 percent by June. But some analysts believe such signaling may embody little more than reassurance that the ECB will be there to support the eurozone economy if the U.S. does slap import tariffs on its exporters. Eurozone inflation staged an unwelcome comeback in December to hit 2.4 percent, the highest level since July. However, policymakers had expected a temporary blip and have indicated they see the Bank’s baseline scenario as largely intact. This sees inflation reaching the ECB’s target of 2 percent in the course of this year, and is based on assumptions that the Bank will continue cutting its deposit rate gradually to 2 percent. The economy, meanwhile, continues to sputter, only barely compensating for contraction in Germany and France with growth elsewhere around the bloc in January. “As the projections are on track, there is a clear argument for delivering the cuts that are factored in,” said JP Morgan economist Greg Fuzesi. Since last June, the ECB has lowered its deposit rate from a record-high 4 percent to 3 percent currently. Irrespective of the ECB’s commitment to “follow a data-dependent and meeting-by-meeting approach,” several policymakers — including influential French central bank chief François Villeroy de Galhau — hinted last week that they were in favor of back-to-back cuts until the deposit rate hits 2 percent over the summer. THE LONG TARIFF SHADOW The Governing Council’s meeting will be overshadowed by the looming threat of U.S. tariffs. These could affect the eurozone economy in a variety of ways, either by hitting the eurozone’s exporters or in leading the European Commission to impose tariffs of its own in response. Over the weekend, Trump demonstrated his willingness to deploy such measures to force trading partners to concede on other issues, threatening a 50 percent levy on Colombian exports after it refused to accept a plane deporting illegal immigrants back to their home country. The Colombian government immediately backed down and the tariff threat was lifted. By April, the ECB should at least have a much clearer picture of the kind of tariffs Trump will impose on Europe. | Kirill Kudryavstev/AFP via Getty Images The Financial Times reported on Monday that incoming Treasury Secretary Scott Bessent has proposed setting tariffs on all imports into the U.S. at 2.5 percent initially, rising by a similar amount on a monthly basis, subject to negotiations with Washington’s trade partners. That would fall short of the worst-case scenario threatened by Trump before last year’s elections. ECB President Christine Lagarde is due to meet Commission President Ursula von der Leyen this evening in Brussels, and while the ECB said their conversation will not touch on the Governing Council meeting this week, the threat of trade-related impacts on the economy has been a matter of mutual concern for months. WHERE IS ‘NEUTRAL’? While analysts largely agree that an interest cut this week and in March are nailed on, they warned that any guidance beyond that may be premature, given uncertainty surrounding the economic outlook. By April, however, the ECB should at least have a much clearer picture of the kind of tariffs Trump will impose on Europe and whether they pose a meaningful threat to either growth or inflation. The ECB is now openly talking about moving toward a “neutral” policy, from the restrictive one it has pursued for the last three years. However, pinpointing at what level interest rates are neutral — neither stimulating the economy nor holding it back — is an art rather than a science. The ECB estimates it could be anywhere between 1.75 percent and 2.5 percent. ING’s global head of macro Carsten Brzeski argued that hitting the upper end of that range may prompt hawks to push for slower moves thereafter. As rates approach neutral territory, the debate is likely to become more heated. Dutch central bank chief Klaas Knot warned last week against straying into “stimulative mode.” Similarly, Société Générale economist Anatoli Annenkov said that aggressive signals by policymakers last week may have been an attempt at “precautionary guidance ahead of potentially damaging U.S. trade policies.” But if the economy holds up, he said, the ECB may well feel “obliged to switch to quarterly rate decisions after March.”

The European Union’s Competitiveness Compass has been postponed by another week to Jan. 29, according to an agenda obtained by POLITICO. The delay was confirmed by a European Commission official and an EU diplomat, who both spoke on condition of anonymity because planning details aren’t yet public. The proposal, which aims to set the economic strategy for the Commission’s work until 2029, was initially due to be unveiled on Wednesday, but was postponed after Commission President Ursula von der Leyen became ill with pneumonia. How sick she was only became clearer last week when the Commission confirmed that she had been hospitalized and is now recovering at her home in Germany. An earlier agenda showed the proposal would be presented next week but the latest planning document, dated Jan. 13, shows another week of delay. “I hope the date will remain Jan. 29,” the Commission official told POLITICO. The Competitiveness Compass is the keystone for a series of initiatives the Commission has scheduled for the next few months, including the Clean Industrial Deal due in February. Drawing from reports from Mario Draghi and Enrico Letta on how to boost the EU’s economy, the initiative aims to tackle the EU’s innovation gap with global rivals, ensure the bloc’s economic security and make progress on decarbonizing EU industry.

FRANKFURT — The European Central Bank cut its key interest rate by a quarter-point to 3.25 percent, as a souring growth outlook and weaker-than-expected inflation in September drove rate-setters to step up the pace of policy easing. “The incoming information on inflation shows that the disinflationary process is well on track. The inflation outlook is also affected by recent downside surprises in indicators of economic activity,” the ECB said in its policy statement. The first back-to-back rate cut in 13 years suggests that Governing Council members are increasingly worried about the eurozone’s growth outlook and less concerned about inflation staging a comeback. Gathering in Ljubljana for their annual off-site meeting, policymakers refrained from signaling how quickly, and how deeply, it may cut again, and said its policy remains restrictive pointing to high domestic inflation and wage growth.  “The Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction,” the ECB said. Earlier on Thursday, final data for September showed eurozone inflation dropped well below the ECB 2 percent target to 1.7 percent, a downward revision from an earlier estimate of 1.8. While the ECB said it expects prices to pick up again later in the year, it also hinted that price stability might be restored a little earlier than it previously thought. It now expects to declare victory “in the course of 2025”, having earlier predicted the second half of next year. Governing Council member Yannis Stournaras said last week that “the most recent data suggests” a return to price stability in the first quarter of next year. Economists and investors expect the ECB to deliver another cut in December amid mounting signs that the region’s economy is running out of steam and that inflation has been brought under control. “In our view, this is unlikely to be the last cut from the ECB this year,” said UBS Global Wealth Management chief economist Dean Turner.  “Another cut is likely in December, and we expect this will be followed by a series of cuts at every meeting through to June next year, with the deposit rate hitting 2 percent before the ECB reaches for the pause button.” Investors will hope to get some signals on the interest rate path ahead during President Christine Lagarde press conference starting at 14:45 CET but may well be disappointed. “There is so much data coming in that I don’t see why Lagarde would have any incentive to send signals,” said Danske Bank economist Piet Christiansen. (This article is being updated.)