The European Central Bank may keep the 2% interest rate until 2027, as cooling inflation struggles to shake the neutral stance

The European Central Bank is expected to keep deposit rates at 2%, continuing the longest period of policy stability since the end of the negative interest rate era. On February 12, according to a Reuters survey, 66 out of 74 economists believe the central bank will remain on hold at least until the end of 2026.

The eurozone’s January inflation rate fell to 1.7%, a 16-month low, sparking some policymakers to warn against excessive price slowdown, but overall economic resilience remains evident. At the February 5 meeting, the ECB reiterated that inflation is expected to stabilize around the 2% target in the medium term and emphasized that future policy decisions will be made on a meeting-by-meeting, data-dependent basis, without pre-committing to a specific interest rate path.

This prolonged pause in policy will provide a stable monetary environment for the eurozone economy but also highlights the policy dilemma the ECB faces in navigating complex economic conditions.

Record Length of Policy Pause

The current interest rate pause at the European Central Bank has officially become its longest sustained period of policy stability since the abolition of negative rates. This stance indicates that the decision-makers believe the current rate level strikes the optimal balance between supporting economic recovery and bringing inflation back to the 2% target.

Looking back at the policy trajectory, the ECB implemented negative interest rates from 2014 to 2019, with deposit facility rates remaining in negative territory for an extended period. Since initiating rate hikes in 2022 and formally exiting the negative rate era, after multiple tightening adjustments, the policy has now entered a prolonged period of observation, surpassing any previous stable intervals.

Markets Have Fully Priced In

The market has fully priced in the expectation of continued rate pause by the ECB. Recent movements in eurozone bond yields and foreign exchange markets indicate that investors have fully incorporated the scenario of the ECB maintaining current policies unchanged.

For markets, the extended period of rate stability means that the financing environment is expected to remain steady in the foreseeable future, providing a relatively clear macroeconomic backdrop for corporate and household financial decisions. Currently, trading focus is shifting from “whether to pause” to “when to shift.” Any incremental signals regarding future policy paths, especially those involving assessments of economic growth and inflation outlooks, could become key variables triggering market volatility.

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