Lead
Frankfurt am Main, 18 December 2025 — ECB President Christine Lagarde and Vice‑President Luis de Guindos told markets today the Governing Council will leave the three key interest rates unchanged while reaffirming the objective to stabilise inflation at 2% in the medium term. Eurosystem staff projections show headline inflation averaging 2.1% in 2025, 1.9% in 2026, 1.8% in 2027 and 2.0% in 2028, with inflation excluding energy and food projected at 2.4% in 2025 and returning to about 2.0% by 2028. Growth forecasts were upgraded — notably domestic demand and investment — and the Council stressed a meeting‑by‑meeting, data‑dependent approach with no pre‑committed rate path.
Key takeaways
- The Governing Council kept all three key ECB interest rates unchanged at the 18 December 2025 meeting, maintaining a data‑dependent stance.
- Eurosystem staff project headline inflation at 2.1% (2025), 1.9% (2026), 1.8% (2027) and 2.0% (2028); core inflation (ex. energy and food) is 2.4% in 2025, easing to ~2.0% by 2028.
- Growth forecasts were revised up to 1.4% in 2025, 1.2% in 2026, 1.4% in 2027 and 1.4% in 2028, driven primarily by domestic demand and higher business investment.
- Labour market remains tight: unemployment was 6.4% in October 2025 and employment rose 0.2% in Q3; compensation per employee rose about 4% year‑on‑year in Q3.
- Services inflation has been strong (3.5% in November), offsetting weaker goods inflation; wage developments are a key upside risk for services inflation.
- Risks are two‑sided: geopolitical tensions, trade shifts and financial‑market repricing could lower activity and inflation, while defence/infrastructure spending and persistent wage pressures could push inflation higher.
- Euro area banks are assessed as resilient with solid capital and liquidity metrics, but macroprudential tools remain the first line of defence against financial vulnerabilities.
Background
Since the spring of 2025 annual inflation has moved in a narrow band and stood at 2.1% in November. The Governing Council has been navigating a context of moderating energy price contributions, persistent services inflation and an economy that has shown unexpected resilience. The staff projections incorporate a one‑year shift in the expected start of the EU Emissions Trading System 2 (ETS2) effect, now assumed to begin in 2028 rather than 2027, which influences projected energy inflation later in the horizon.
The euro‑area expansion in recent quarters has been services‑led, with stronger consumption, investment and a notable export contribution — chemicals and activity linked to Ireland were singled out. The ECB notes previous policy rate cuts over the prior year fed through to market rates and lending rates, and that the transmission of policy continues to be monitored closely as part of the assessment of appropriate stance.
Main event
At the press conference in Frankfurt on 18 December 2025 President Lagarde explained the unanimous Governing Council decision to hold rates and to remain fully data dependent. The Council reiterated that interest‑rate choices will be guided by the inflation outlook, the balance of risks and incoming economic and financial information, and emphasised it is not committing to any predetermined path for future rates.
The Eurosystem staff projections underpinning the decision show headline inflation easing below 2% on average in 2026–27, largely because past energy shocks drop out of annual rates, before returning to target in 2028 when energy inflation is expected to pick up. Core inflation (ex. energy and food) remains elevated in the near term but is projected to fall toward 2% by the end of the horizon.
On activity, the ECB highlighted 0.3% growth in Q3 2025, driven by stronger consumption and investment, with exports making a larger than expected contribution. The labour market is described as robust — unemployment at 6.4% in October and employment rising 0.2% in Q3 — while job vacancies have cooled, indicating easing labour demand.
Lagarde and Vice‑President de Guindos also addressed policy instruments beyond rates, underlining readiness to adjust all tools within the ECB mandate to secure price stability and to ensure smooth transmission. They flagged ongoing monitoring of transmission channels, wage dynamics and financial conditions as central to forthcoming decisions.
Analysis & implications
The upgraded growth profile — with 1.4% pencilled in for 2025 and 2027 — shifts the policy trade‑off slightly. Stronger domestic demand and higher investment, partly attributed to private‑sector adoption of AI and intangible capital spending, raise potential growth and may temper disinflationary forces. If such investment proves persistent, it could support productivity and possibly gradual upward pressure on a long‑run neutral rate, though r* remains unobserved and highly uncertain in the current environment.
Services inflation and wage dynamics are the principal near‑term concerns for the Governing Council. Services inflation rose to 3.5% in November, and compensation per employee grew 4% year‑on‑year in Q3, partly reflecting special payments above negotiated wages. The staff expect wage growth to decelerate and to be somewhat below 3% by late 2026, but a slower normalisation of wages would delay the fall in services inflation.
Energy and ETS2 timing materially affect the horizon. A later start of ETS2 (now expected in 2028) reduces its near‑term upward pressure on prices but raises the chance of an energy‑led pickup in 2028. That pattern highlights the asymmetry policy makers face: near‑term disinflation driven by energy base effects versus medium‑term upside if carbon‑price pass‑through and fiscal spending push demand.
Financial conditions have tightened modestly since the last meeting, with market rates higher but bank lending rates for firms broadly stable (3.5% in October). The ECB’s dual focus on monetary policy and financial stability means macroprudential measures will remain central to prevent the build‑up of vulnerabilities, especially if unexpected market repricing occurs.
Comparison & data
| Year | Headline inflation | Inflation ex. energy & food | Real GDP growth |
|---|---|---|---|
| 2025 | 2.1% | 2.4% | 1.4% |
| 2026 | 1.9% | 2.2% | 1.2% |
| 2027 | 1.8% | 1.9% | 1.4% |
| 2028 | 2.0% | 2.0% | 1.4% |
The table summarises the Eurosystem staff central projections published with the statement. The pattern shows headline inflation dipping below 2% in 2026–27 before returning to target in 2028, while core inflation converges toward 2% and growth stabilises around 1.2–1.4% across the projection horizon. These numbers frame the Council’s cautious, data‑driven stance: short‑term disinflation is balanced against medium‑term upside risks from wages, fiscal/investment plans and energy‑related price shifts.
Reactions & quotes
We are determined to ensure that inflation stabilises at our two per cent target in the medium term and will act meeting‑by‑meeting on the basis of incoming data.
Christine Lagarde, ECB President (press conference, 18 Dec 2025)
All optionalities remain on the table; there was unanimous support to keep rates unchanged today while monitoring transmission and underlying inflation dynamics.
Luis de Guindos, ECB Vice‑President (press conference, 18 Dec 2025)
Eurosystem staff project headline inflation averaging 2.1% in 2025, easing to 1.9% in 2026 and returning to 2.0% in 2028, with investment and domestic demand supporting growth.
Eurosystem staff projections (ECB)
Unconfirmed
- Whether the recent AI‑led surge in private investment represents a durable, long‑term increase in potential growth rather than a temporary boost remains to be confirmed.
- The sustainability of the recent positive export contribution (notably in chemicals and sectors linked to Ireland) is uncertain and may reflect temporary inventory or front‑loading effects.
- Legal and procedural questions around appointing sitting Executive Board members to the ECB Presidency were raised; the final legal interpretation and any precedent remain to be clarified.
- The eventual design and legislative outcome for the digital euro, once vetted by the Council and Parliament, is still pending and could change implementation timelines.
Bottom line
The ECB held rates on 18 December 2025 and presented projections that envisage headline inflation falling below 2% in 2026–27 before returning to target in 2028, while growth forecasts were revised up on stronger domestic demand and investment. The Governing Council emphasised a meeting‑by‑meeting, data‑dependent approach and kept all policy options open rather than committing to a path for rates.
Key risks remain two‑sided: wage and services‑inflation persistence, fiscal and defence spending, and energy/ETS2 dynamics could push inflation higher, whereas trade frictions, a stronger euro or a financial‑market repricing could weigh on demand and lower inflation. Markets and policy makers should therefore prepare for conditional adjustments rather than a predetermined policy trajectory.