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The European Central Bank decided on Thursday to keep the deposit rate unchanged at 2%, marking the fifth consecutive pause in rate adjustments since June of last year. Monetary policy makers are assessing the economic impact of the significant appreciation of the euro and the renewed threat of tariffs from Trump.

According to the statement, the deposit facility rate of the European Central Bank in the eurozone is currently 2%, the marginal lending rate is 2.4%, and the main refinancing rate is 2.15%, all in line with expectations and previous values.

The European Central Bank did not provide guidance on the next policy action in the statement, reiterating that decisions will be made based on future data. The central bank stated that despite the challenging global environment, the eurozone economy still shows some resilience, but the outlook remains highly uncertain, particularly affected by unclear trade policies and geopolitical tensions.

Officials are closely monitoring the impact of the euro's appreciation on export competitiveness and inflation prospects. With tariff risks resurfacing, the uncertainty in the external environment is increasing, which may exert dual pressure on economic growth and prices.

The market reacted mildly to the decision. The euro fell slightly by 0.1% against the dollar to $1.1795, and the benchmark German government bond yield was nearly flat at 2.86%. Traders expect the European Central Bank to only cut rates by 5 basis points by the end of this year.

Inflation Falls but Risks Rise

The eurozone's inflation rate in January fell to 1.7%, below the European Central Bank's target of 2%. According to data released by Eurostat on Wednesday, this decline was mainly due to lower energy costs and a stronger euro. The core inflation rate dropped from 2.3% in December last year to 2.2%, the lowest level since October 2021.

The European Central Bank expects the average inflation rate to be 1.9% in 2026 and 2.1% in 2025. Although inflation is temporarily below the target, the bank believes this phenomenon is only temporary.

Nomura analyst Andrzej Szczepaniak stated, he expects the next action of the European Central Bank will be to raise interest rates rather than cut them, although rates will remain unchanged in the "foreseeable future." He predicts that the unemployment rate in the eurozone will continue to decline, "increasing wage growth and inflationary pressures," and expects at least two rate hikes by 2028.

The Bank of England also decided on Thursday to keep the interest rate unchanged at 3.75%, but the voting results were unexpectedly close. Five members supported maintaining the rate, while four members voted for a 25 basis point cut to 3.5%. Governor Bailey once again cast the decisive vote, stating, "We now believe that inflation will fall to around 2% in the spring. This is good news."

Euro Appreciation Poses Threat

The significant appreciation of the euro has become one of the main risks facing the European Central Bank. The euro briefly broke through the key threshold of $1.20, which could suppress exports or make the decline in consumer prices more persistent.

French central bank governor Francois Villeroy de Galhau stated that European Central Bank officials are closely monitoring the euro's appreciation. While they do not set specific exchange rate targets, the euro's movement will help guide decision-making.

Tariff uncertainty is another source of risk. European Central Bank Executive Board member Piero Cipollone warned last week that the outlook is becoming more unclear, particularly regarding tariffs, which could suppress investment and drag down growth. Austrian central bank governor Martin Kocher told Bloomberg Television that this is one of the reasons why policymakers need "full discretion" to respond "quickly and decisively" when necessary

Economic Resilience and Policy Divergence

The Eurozone economy is unexpectedly strong by the end of 2025, expected to benefit from a surge in spending in Germany and a rearmament race in the region.

Meanwhile, other major central banks are also keeping their policies unchanged. The Bank of England maintained its benchmark interest rate at 3.75% earlier on Thursday, and the Federal Reserve also kept rates steady last week. However, the market expects both central banks to further cut rates in the coming months.

The Bank of England's voting results surprisingly decided to keep rates unchanged by a vote of 5 to 4. Governor Bailey stated, "We now believe inflation will fall to around 2% in the spring, which is good news." He added, "If all goes well, there should be room for further rate cuts this year."

Traders and analysts currently expect the European Central Bank to not change borrowing costs in the next two years. ECB officials have described the current monetary policy setting as "in a good position." This pause in the easing cycle coincides with a period of personnel changes at the ECB, with Croatia's Boris Vujcic set to replace Vice President Luis de Guindos in June, and three other senior officials, including Lagarde, will be replaced in 2027.

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