Monetary policy in the euro area: ECB extends interest rate break: key interest rates remain unchanged

With this step, the ECB is extending its interest rate break in view of uncertain times and contained inflation. The central bank had already not touched the key interest rates at the monetary policy meetings in July, September and October. There had previously been a series of reductions: as recently as spring 2024, the deposit interest rate that banks receive when they park money at the central bank was twice as high at 4.0 percent.

Lower key interest rates tend to be good for the economy: loans become more affordable, companies and private individuals can obtain financing for purchases or investments more cheaply and can thus ensure economic growth. However, savers receive less interest on current and fixed-term deposits because banks pass on lower deposit interest rates for parked funds to their customers.

Are interest rates likely to go up again?

ECB President Christine Lagarde recently emphasized repeatedly that with the current interest rate level, the central bank is “well positioned” to navigate the uncertainty. This is an indication that key interest rates in the euro area will remain stable for the time being.

Many economists also believe that interest rate cuts have bottomed out in the euro area, which will admit Bulgaria as its 21st member on January 1, 2026. ECB Executive Board member Isabel Schnabel recently said that she expects key interest rates in the euro area to remain at the current level “for some time.” Schnabel said in an interview that she “completely agrees” with the market view “that the next interest rate step will be a hike, even if not in the near future.”

Inflation close to the ECB target

The fact that the inflation that got out of hand after the start of the Russian attack on Ukraine is now under control again also suggests that the ECB will continue to wait and see. In November, the inflation rate in the euro area was 2.1 percent. That is just above the central bank’s target value.

The ECB is aiming for an annual inflation rate of 2.0 percent for the euro area in the medium term – far enough away from zero. Permanently low prices are considered a risk to the economy: companies and consumers could postpone investments in the expectation that things will soon become even cheaper. Even if prices rise too much, it is poisonous for the economy. Then consumers lose purchasing power. This reduces consumption as an important pillar of the economy.