The European Central Bank left interest rates on hold as expected on Thursday (February 05), playing down the impact of dollar moves on its future policy choices and stressing that its inflation outlook remained largely unchanged.

The euro zone's central bank has been on hold since ending a year-long run of rate cuts in June, and surprisingly resilient growth coupled with easing price pressures have taken nearly all pressure off policymakers to provide any further support. In a statement, the ECB acknowledged continued uncertainties around global trade policy and geopolitical tensions but said an updated assessment still saw inflation stabilising at its 2% target in the medium term.

"We are in a broadly balanced situation at the moment," ECB President Christine Lagarde told a press conference of upside and downside risks to that outlook, reaffirming that monetary policy remained in a "good place".

Asked what impact on its outlook last week's dollar tumble and rebound might have, Lagarde said the rate-setting Governing Council had discussed the matter but noted that dollar depreciation was not new and went back as far as March 2025. "In the last few weeks, in fact since the summer, it has fluctuated in a range," she said, adding policymakers had therefore concluded that foreign exchange rate moves since last year were "incorporated in our baseline".

A strong euro relative to the dollar lowers import costs, especially for energy, curbing inflation at a time when it is already below target, if only temporarily.

With the dollar dip unwinding in recent days, the euro is actually weaker on a trade-weighted basis than at the ECB's December meeting, reinforcing market and economist expectations for no interest rate changes in 2026, followed by some policy tightening later in 2027. Lagarde repeated the bank's official line that policy would be data-dependent and that it had no pre-determined rate path.

Inflation, the ECB's primary focus, slipped to 1.7% across the euro zone last month on lower energy costs, 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 if anything, longer-term inflation expectations have been inching up, not down, on solid activity data and energy price rises.

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.

DESCRIPCIÓN DE IMÁGENES

1. ARRIVAL OF EUROPEAN CENTRAL BANK (ECB) PRESIDENT, CHRISTINE LAGARDE, TO PRESS CONFERENCE

2. JOURNALIST ASKING QUESTION

3. (SOUNDBITE) (English) ECB PRESIDENT, CHRISTINE LAGARDE, SAYING: "The Governing Council today decided to keep the three key ECB interest rates unchanged. Our updated assessment reconfirms that inflation should stabilise at our 2% target in the medium term. The economy remains resilient in a challenging global environment. Low unemployment, solid private sector balance sheets. The gradual rollout of public spending on defence and infrastructure and the supportive effects of our past interest rate cuts are underpinning growth. At the same time, the outlook is still uncertain, owing particularly to ongoing global trade policy uncertainty and geopolitical tensions. We are determined to ensure that inflation stabilises at our 2% target in the medium term."

4. PRESS CONFERENCE IN PROGRESS

5. JOURNALIST ASKING QUESTION

6. (SOUNDBITE) (English) ECB PRESIDENT, CHRISTINE LAGARDE, SAYING: "The governing council took a unanimous decision to keep the rates at their current level unchanged. In relation to our risk assessment, you will have seen that we take a one-hand, the other-hand approach, both in relation to activity and in relation to inflation. And if you look at the balancing act between the two, we are, as I would call it, in a broadly balanced situation when it comes to risk assessment. And some risks have ticked up, others have ticked down, but on balance, taking the various specific elements that we make sure we list in a rather exhaustive way, we believe that we are in a broadly balanced situation at the moment."

7. JOURNALIST ASKING QUESTION

8. (SOUNDBITE) (English) ECB PRESIDENT, CHRISTINE LAGARDE, SAYING: "Now, what we observed collectively is that the dollar has depreciated measurably against the euro, but not in the last few days. But since March 2025, that's when you see the significant change at the time. And in the last few weeks, actually since the summer, it has fluctuated within a range. And whether you look at the euro, US dollar, whether you look at nominal effective exchange rate, the story is the same. As a result of that observation, we concluded that the impact of exchange rate appreciation since last year is incorporated in our baseline."

9. PRESS CONFERENCE IN PROGRESS

10. JOURNALIST ASKING QUESTION

11. (SOUNDBITE) (English) ECB PRESIDENT, CHRISTINE LAGARDE, SAYING: "I would also observe that the current range within which the euro relative to the dollar is evolving is very much in line with the overall average of that exchange rate between the euro and the dollar for as long as the euro has been around."

12. JOURNALIST ASKING QUESTION

13. (SOUNDBITE) (English) ECB PRESIDENT, CHRISTINE LAGARDE, SAYING: "You know, one of the good news stories, as far as the European economy is concerned, is that while the net export activity and contribution to growth is on the decline, the domestic market is responding strongly. Consumption is improving a little bit, but not much. But investment is the big story."

14. JOURNALIST ASKING QUESTION

15. PRESS CONFERENCE IN PROGRESS