ECB: Cautious Approach Becomes the New Monetary Norm
As the European Central Bank's December meeting approaches, it maintains a facade of calm. The economy is faring better than expected, and inflation is easing without drastic measures. However, behind this status quo lies a more delicate issue: the risk of prolonged under-inflation.
A Stronger Than Expected Economy
The ECB enters the end of the year with a significantly improved macroeconomic outlook. Eurozone GDP growth for the third quarter was revised to +0.3%, a figure that surpasses the expectations set by the institution a few months earlier. Business surveys suggest that this momentum will continue through the end of the year, while the labor market remains surprisingly resilient, with unemployment rates near historical lows.
This renewed strength challenges growth projections that were regarded as overly cautious. For 2026, the ECB is still forecasting a 1.0% GDP increase, but several economists, including those at MUFG, now believe that a figure closer to 1.2% would better align with the observed momentum. In this context, maintaining the status quo appears rational: there is currently no impetus for a rapid adjustment of monetary policy.
Inflation: A Deceptive Stability
On the pricing front, overall inflation remains close to the target, at 2.2% in November. This stability supports the ECB in its narrative of a regained balance. However, beneath the surface, the picture is more mixed. Service inflation remains persistent, driven by a still robust increase in wages, while the growth in compensation per employee continues to exceed official projections.
At the same time, several disinflationary forces are gaining momentum. Energy prices continue to normalize, food-related pressures are easing, and the one-year postponement of the ETS2 mechanism's implementation significantly alters the medium-term inflation outlook. As a result, the ECB's new projections might indicate an inflation rate well below 2% through 2026 and 2027, before returning to target by 2028.
Why the Next Move Might Be a Drop
The ECB officially maintains a strictly data-dependent stance, without prejudging the next rate move. However, the balance of risks now seems to lean more towards easing rather than tightening. MUFG highlights several factors that could amplify disinflation: an appreciation of the euro, energy prices that are lower than expected, a rapid slowdown in wage pressures, and, in the background, intensified international competition related to Chinese exports.
In a scenario where inflation hovers around 1.5% for several quarters, the ECB would face a delicate dilemma. How far can it tolerate a sustained deviation from the target without adjusting its policy? With key interest rates at 2%, the median point of the neutral rate estimate, there is room to maneuver. What remains to be seen is when the ECB will decide that stability equates to excessive inaction.
This content has been automatically translated using artificial intelligence. While we strive for accuracy, some nuances may differ from the original French version.
