The European Central Bank (ECB) is leaving the key interest rate, which is important for banks and savers in the euro area unchanged at two percent. The ECB is thus meeting the expectations of economists and is extending the so-called interest rate pause for the fourth time in a row.
The last reduction of the key interest rate That’s half a year ago: Between June 2024 and June 2025, the ECB reduced the interest rate from the historic high of four percent to the level of two percent in increments of 0.25 percentage points. Previously, against the background of the consequences of the corona pandemic and the energy crisis, the interest rate was increased from minus 0.5 percent to four percent within less than two years.
High key interest rates reduce inflation and slow the economy
High key interest rates are considered a standard instrument used by central banks to combat inflation: they are passed on by private banks to their customers, which makes loans more expensive and reduces consumption. This in turn weakens the demand for goods and services and thus also the prices.
In the long run, credit-financed investments also become more expensive, which harms the economy. Therefore, central banks usually lower the key interest rate again as soon as inflation has fallen. The ECB expects one in the euro area this year comparatively low inflation of 2.1 percent. In 2022, the inflation rate in the euro area reached a high of 8.4 percent.
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ECB improves economic forecast for 2026
The inflation rate is currently only slightly above the ECB’s target of two percent. Another reason for the extended interest rate break: According to the central bank, the effects of US President Donald Trump’s tariff policy on the economy in the euro area are so far less serious than originally feared.
In addition to the interest rate decision, the ECB also published its expectations for the economy in the coming year. The central bank announced that economic output is expected to grow by 1.2 percent in 2026. This improved her expectations compared to the September forecast, when it was still based on 1.0 percent. Inflation will then probably be 1.9 percent, below the two percent target.
