Europe: ECB Shows No Need to Adjust Policy Interest Rates

■ The ECB has kept its main policy rates unchanged for the fourth consecutive time, stating that it will continue to base its policy decisions on data released each time.  

■ Markets are beginning to focus on whether the rate-cutting cycle has ended and the possibility of future rate hikes, but the strengthening euro will be a key focus for price stability from now on. 
 
   At its Governing Council meeting on the 18th, the European Central Bank (ECB) decided to maintain its three main policy rates unchanged, including the central bank deposit rate (DFR), which serves as the lower bound for policy rate operations. Since July, policy rates have remained unchanged for four consecutive times, and the policy guidance in the statement has also remained unchanged, clearly stating that it will continue to base its policy decisions on data released each time. With inflation continuing to approach the target level and prices remaining stable, the need for early adjustments to monetary policy has not increased. ECB President Lagarde also clearly stated at the press conference following the Governing Council meeting that, given the current uncertainties, it is unable to provide forward guidance. In terms of risk assessment, downside risks include: declining export demand due to US tariff policies, increased alternative exports from countries with excess capacity, such as China, to the Eurozone, and a stronger euro. Upside risks include: global supply chain disruptions, a delayed easing of wage pressures, expanded defense and infrastructure spending planned after 2026, and climate change. The delayed easing of wage pressures has been added as an upside risk. In this updated macroeconomic forecast, the real GDP growth rate for 2025-2027 has been revised upwards, and it is expected that economic growth will remain at just over 1% around 2028, a new addition to the forecast period. Regarding the Consumer Price Index (HICP), forecasts for 2026 and 2027 have been revised, indicating that the inflation rate will remain below the 2% inflation target through 2027. 
 
   Currently, the DFR is 2.00%, within the neutral interest rate range estimated by the ECB (1.75%-2.25%). Given that concerns about a significant increase in the price outlook have not risen significantly, the ECB is expected to maintain a cautious policy stance. On the 8th, ECB Executive Director Schnabel stated that the next policy rate adjustment might be a rate hike, prompting the market to focus on whether rate cuts had ended and the possibility of future rate hikes. However, Lagarde avoided making a clear statement on the timing and direction of the policy rate adjustment at the press conference. Recent declines in oil and natural gas prices and the strengthening of the euro could be a downside factor to the price outlook in the staff's macroeconomic forecasts, as these forecasts assume that energy prices and exchange rates will remain roughly sideways around the base date. Sensitivity analysis in the forecasts shows that if the euro appreciates to $1.21 against the dollar in 2026, the HICP increase that year will be 0.1 percentage points lower than the predicted 1.9%. If the deviation from the target for inflation widens further, it could increase the need for another rate cut. ECB Vice President de Guindos stated in July, when the euro strengthened, that the situation would become complicated if the euro reached the $1.20 level against the dollar. Although the euro's appreciation momentum was temporarily halted and the ECB reduced its statements on exchange rates, the euro is now approaching its July level against the dollar and is above the $1.16 assumption on which price forecasts are based. Going forward, the euro exchange rate issue may once again become a focal point in discussions on price stability.