We’re expecting to stay on hold, but diverging views on what comes next and a new round of forecasts. Expect an exciting European Central Bank meeting next week
When the European Central Bank meets again next week, some will get a first idea of how their family Christmas dinner might look the week after: stimulating – at times controversial – conversations without any escalating disputes. Like gifts under the Christmas tree, the latest round of ECB projections will be awaited with high expectations by all ECB members. Some will be happier than others; some might even ignore them.
Developments Since Last Meeting Call for Keeping Rates on Hold
Let’s leave the Christmas parallels aside for a moment. Since the ECB’s October meeting, the incoming data has done very little to justify any rate change on 18 December. While third-quarter growth was clearly stronger than the ECB expected, sentiment indicators also point to continued resilience. At the same time, the fundamentals of the eurozone economy have not changed. US tariffs still weigh on exports, investment is being held back by uncertainty, and 2026 growth remains highly dependent on German fiscal stimulus. Inflation has come in slightly higher than previously expected, but the delayed implementation of the EU Emissions Trading System (ETS2) should push expected inflation by some 0.2 percentage points from 2027 to 2028.
As a result, there’s very little reason for the ECB to change its current monetary policy stance, once again confirming it’s in a ‘good place’.
New Round of Projections Unlikely to Reflect Schnabel’s Upside Risks to Growth and Inflation
A fresh round of ECB projections will be an important element next week. While ECB board member Isabel Schnabel said this week that, compared with September, the risks to growth and inflation are tilted to the upside, we doubt this will be reflected in ECB projections. To the contrary, it looks very unlikely that the central bank will change the longer-term growth trajectory of 0.3% quarter-on-quarter in 2026 and 2027. Regarding inflation, the 2026 forecast may be raised slightly (from 1.7% year-on-year in the September projections), while 2027 should be revised downward due to the delayed implementation of ETS2. However, with inflation forecasts for 2026 and 2027 clearly below 2%, it’s difficult to quantify upside risks.
In her Bloomberg interview this week, Schnabel unexpectedly gave the upcoming ECB debate a hawkish tilt. She said she agreed with market expectations that the next move would be a hike, without providing any indication of timing. This comment, however, will be hard to find in the new ECB projections. It also doesn’t echo the sentiment of the minutes of the October meeting, which clearly had a dovish, not a hawkish, bias. This suggests that views at the ECB are diverging, not converging, and that remaining on hold appears to be the best compromise. As a result, we expect ECB President Christine Lagarde to refrain from providing any forward guidance or risk assessment of the inflation outlook at next week’s meeting.
Our Base Case Continues Seeing the ECB on Hold for Foreseeable Future
Looking beyond next week, we don’t think that Schnabel’s comments currently reflect the ECB’s majority view. With expected sub-2% inflation forecasts for the next three years, we see any following ECB rate change as a cut, not a hike, at least through late spring next year. After that, the window for rate cuts will likely close, and fiscal stimulus that meets supply-side constraints could bring back inflationary pressures. But that is a 2027 story, rather than one for 2026.
Musical Chairs Is On Again
Finally, something that’s probably (for now) more for the ‘rumours and gossips’ corner: Schnabel’s comment that she would stand ready as a potential successor to Lagarde has sparked the musical-chairs debate. Many seem to have overlooked the European Treaties, which clearly state that Executive Board members, including the ECB president and vice-president, are appointed for a single, non-renewable term.
More than 20 years ago, a debate arose over whether then-vice president Christian Noyer could become ECB president instead of the designated Jean-Claude Trichet. Legal opinions differed, but a key difference between then and now is that Noyer did not serve a full eight-year term at the ECB. This is because Executive Board members were phased in when the ECB was established. At the current juncture, trying to bend any Treaty rules by arguing that there’s a difference between an ‘ordinary’ Executive Board member and the presidency, just to allow an Executive Board member to become president, looks highly unlikely. Not everything legally possible is politically desirable.
Just Like Your Normal Christmas Dinner
All in all, next week’s ECB meeting promises to have all the ingredients of a typical family gathering at Christmas: stimulating and at times controversial conversations, a few rumours and a bit of gossip, accompanied by vague talks about the future but no hard action.
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