• The ECB is set to reiterate the familiar ‘good place’ narrative at next week’s meeting, leaving rates and guidance unchanged. The recent market repricing towards the possibility of a rate cut next year will increase attention on the updated projections, wider communication and Q&A. While the official data-dependent stance is set to be preserved, President Lagarde may hint that an extended hold is likely.
• We expect the ECB will raise its growth projections after a recent upside GDP surprise and survey indications of continued momentum into 2026. The resilient economy is likely to be a key theme. The core inflation numbers will likely be revised higher as well, but we expect that this will be offset in the headline projections by softer energy and food numbers. Base effects and the delayed implementation of the EU’s expanded emissions trading system point to an extended period of undershooting inflation from next year.
• Despite that, the ECB is content with its current policy setting, as well as market pricing for stable rates next year. The bar for any policy adjustment at upcoming meetings is clearly very high. But we still see a cut as more likely than a hike next year. To our minds, inflation risks remain tilted to the downside – stronger EUR, softer energy pricing and trade diversion could all push inflation down to rates which would test the ECB’s apparent tolerance for sub-target inflation.

The resilient macro backdrop supports the ECB’s current policy stance

ECB officials are likely to reiterate the familiar ‘good place’ mantra at next week’s meeting, leaving rates and core guidance unchanged. While the data-dependent and meeting-by-meeting approach is set to remain, we expect President Lagarde will give further hints that policy is likely to remain on hold for an extended period. Headline inflation has hovered within 0.2pp of target since March and that has given the ECB understandable confidence in its current policy setting.

That said, we certainly expect a more interesting meeting than the uneventful affair last time out (our take here) after market participants have increasingly priced in the possibility of a hike in H2 next year. Against that backdrop, attention will be focused on the tone of the communication, the Q&A and the updated projections.

The trigger for the market repricing has been firmer macro data which has prompted various officials such as Simkus to suggest that inflation risks have become more balanced and there’s no need to adjust policy rates. Executive Board member Schnabel, typically hawkish but influential, went further by saying she is “comfortable” with expectations that the next move could be a hike.

Q3 GDP growth showed broad resilience to US tariffs…

…and surveys indicate a degree of momentum into 2026

This reflects an improving macro backdrop. The global economy is entering 2026 on a firmer footing than anticipated earlier this year, supported by both policy measures and resilient private sector dynamics (see here). It has also been a relatively calmer period in terms of geopolitical and tariff developments.

In the euro area, the unemployment rate remains close to historical lows. Q3 GDP growth was revised up from 0.2 to 0.3% Q/Q, above the ECB’s September projection (0.0%). Recent survey data suggests that a similar rate of expansion could be maintained in Q4 and Lagarde indicated this week that the ECB’s growth projections could be raised. With better momentum into 2026, the ECB’s latest number (1.0%) does look low – our current forecast is for 1.2%.

On prices, headline euro area HICP surprised slightly on the upside at 2.2% Y/Y in the flash estimate for November. The services rate edged up to 3.5%, although it was possibly bolstered by volatile travel components. Growth in compensation per employee, the ECB’s preferred measure of wage growth, remained unchanged at 4.0% Y/Y in Q3, well above the September projection for 3.2%.

We still see risks being tilted towards further easing

The ECB’s updated projections are likely to show a greater degree of inflation persistence in the core following these releases. Lower energy pricing and easing food inflation point to minimal changes in the headline numbers, however, which are still set to fall markedly next year on the back of energy base effects.

The ECB is currently projecting sub-2% inflation rates throughout 2026. The projection horizon will be extended to 2028 next week. With the implementation of the EU’s ETS2 delayed by a year, there will not be the previously expected boost from energy in 2027, which is set to prompt a mechanical revision downwards to projected inflation that year. As a result, the ECB could present a set of projections showing an extended period of undershooting inflation, before a return to target in 2028.

That would be a communication challenge. We expect policymakers will hint at a degree of tolerance to sub-2% inflation and could point to the ongoing persistence in underlying services inflation, alongside resilient growth figures ahead of the expected German fiscal boost next year. With policy rates at 2%, the mid-point of the ECB’s estimate of ‘neutral’, officials will feel that they are well-placed to respond to risks on either side of the mandate.

We have less conviction in our call for further ECB easing after recent comments, but our view remains that a cut is more likely than a hike next year. We continue to see risks to the inflation outlook as tilted to the downside. The ECB’s wage tracker points to a rapid easing in pay pressures which would ease concerns around sticky services inflation. The disinflation process could be further bolstered by a range of factors: e.g. 1) further EUR strength, 2) weaker-than-expected energy pricing and 3) dumping of goods from China. A combination of these could result in a more substantial undershoot. If inflation rates were to fall to ~1.5%, say, for several months that would test the ECB and could prompt a calibration lower.

For now, policymakers are clearly content with how well anchored market expectations are around the current policy rate and we expect to see further comments to reinforce this stance next week.

Rates at neutral and inflation hovering around target – the ECB has good reason to sound content

We expect the updated projections will continue to show an undershoot next year, despite recent upside surprises