ECB Expected to Freeze Policy Rates Amid Currency Turbulence

(MENAFN) The European Central Bank (ECB) is poised to maintain current interest rates through the medium term, though the euro's appreciation against the dollar is emerging as a critical variable that could reshape the monetary authority's calculations.

Market consensus anticipates the ECB will hold rates steady at its February policy meeting and sustain that position for an extended period, despite solid economic fundamentals across the eurozone.

Regional economic indicators demonstrate resilient activity, but currency strength is introducing deflationary pressures that central bankers are closely monitoring for potential policy implications.

Peter Vanden Houte, chief economist at ING Group, told media that the eurozone expanded 0.3% in the final quarter of 2025, while the EU Commission's economic confidence index surpassed January projections.

"Economic data plead for stability in interest rates," he said. "At the same time inflation continues to hover around 2%. All of this will reassure the ECB that they are still 'in a good place' in terms of monetary policy."

Houte cautioned that recent exchange rate dynamics are eroding the ECB's comfort zone, as dollar weakness drives euro strength and generates concern within the institution.

He highlighted that French central bank governor Francois Villeroy de Galhau signaled currency movements may become a pivotal factor steering policy decisions in coming months.

"The ECB staff published a risk scenario in December, where they computed that a euro appreciation to 1.25 against the dollar would reduce inflation with 0.2 percentage points," Houte explained. "If we would see this level, I can imagine that the pressure to cut rates again will strongly increase. But we are not there yet. If the dollar stabilizes around 1.20, which we believe, the ECB will most likely keep interest rates at the current level for some time to come."

Marco Wagner, senior economist at Commerzbank, told media the upcoming ECB policy session should prove "fairly unspectacular," with no rate adjustments anticipated while the euro/dollar exchange rate is forecast to average 1.16.

"If the euro remains strong and the dollar weak, this could gradually have an impact on the ECB's economic and inflation projections," he said. "In this respect, it remains to be seen how the ECB Governing Council members will assess these market movements."

Bas van Geffen, senior macro strategist at Rabobank, told media he anticipates the ECB will maintain its current stance through 2026, noting that "the euro's gains may draw some verbal intervention, but we believe the currency can appreciate quite a bit further before it would warrant another cut."

Alain Durre, head of Europe macro research at Natixis, told media the ECB will preserve unchanged rates at its February gathering, requiring "the combination of a persistently strong euro and materially lower energy prices" to trigger a reduction.

"The crucial factor in our assessment is that the disinflationary impact from euro appreciation is more durable than the inflationary pressure from volatile energy prices," he added.

Jan-Paul van de Kerke, senior economist for the Netherlands and the eurozone at ABN AMRO, told media the euro's recent gains stem primarily from dollar depreciation.

He emphasized the ECB likely won't directly target exchange rates but will track currency fluctuations affecting growth and price stability.

"Our base case already sees the EUR/USD moving higher this year, but nonetheless, we expect monetary policy to stay on hold," he added.

The delicate balance between solid economic performance, stable inflation near the 2% target, and currency appreciation creates a complex environment for ECB policymakers as they navigate competing pressures in 2026.

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