Why the ECB has kept the interest rate unchanged at 2%

Inflation continues to move close to the 2% target. Energy has become cheaper and food prices are rising more slowly. Core inflation – which excludes the often highly volatile prices of energy and food – has also been falling for some time and is also approaching 2%. Only services prices are still rising a bit faster than desired, but there too we see wage growth slowing down. The ECB expects underlying price pressures to ease further during 2026.

The economy continues to grow...

The euro area economy continues to expand. In the fourth quarter of 2025, the economy grew by 0.3%, and early indicators for 2026 are also encouraging. Businesses are seeing demand and production pick up - with the services sector continuing to outperform manufacturing - and many are investing in AI and other technologies. Low unemployment, gradual increases in public investment in defence and infrastructure, and support from previous interest rate cuts are also contributing to economic growth.

At the same time, the outlook remains uncertain. The euro area continues to face an unstable global environment. Fluctuations in confidence in financial markets, geopolitical tensions and disruptions in global trade can slow down growth. On the other hand, higher investment in defence and infrastructure and further European market integration could actually strengthen the economy. Risks are also two-sided with respect to inflation. Weaker demand, cheap imports from China and a stronger euro could depress inflation, while higher energy prices – for example due to rising tensions in the Middle East, disruptions in supply chains or extreme weather conditions – could boost inflation. Given this mix of factors, a stable monetary policy is appropriate at the moment.

How stable interest rates influence businesses and households

When the ECB adjusts the policy rate, financial markets usually react immediately: short-term interest rates move with the policy rate, while long-term interest rates are mainly determined by expectations about future policy. For some time, after a series of cuts in 2024-2025, the policy rate has been stable at 2%. This level does not stimulate the economy, but does not slow it down either. As a result, movements in market interest rates are relatively subdued.

These interest rates work their way into the interest rates paid by households and businesses with some delay. Mortgage and corporate rates have fallen since the 2023 peak and have been relatively stable since the summer of 2025. The average borrowing rate for businesses was 3.6% at the end of last year, more than 1.7 percentage points below the peak. The interest rate households pay for taking out a mortgage remained unchanged at 3.3% in December, some 0.7 percentage points lower than the peak in 2023.

Interestingly, the gap between interest rates on loans to households and businesses has narrowed significantly: from 1.4 percentage points in March 2024 to about 0.2 percentage points now. This difference is mainly explained by the way households borrow. Many mortgages have long fixed-interest periods, making them less sensitive to fluctuations in short-term interest rates. In contrast, businesses are more likely to borrow at shorter maturities, so their interest rates actually react more strongly to current monetary policy. As a result, we see corporate interest rates falling more readily when policy rates are cut.

Businesses benefit from those lower financing costs. Under normal circumstances, this should boost their investment plans. However, the ECB's most recent Bank Lending Survey (BLS) – in which banks report on their lending – shows that the slight increase in demand for business loans over the past three quarters is mainly related to the financing of inventories and working capital, and less to investment. At the same time, banks have actually tightened their corporate credit standards somewhat due to higher risks in the economic outlook and a decreasing risk appetite. Banks exercise such caution partly, but certainly not exclusively, towards businesses directly affected by uncertainty around changes in trade policy.

Demand for mortgages has been rising since early 2024. According to banks, this is mainly due to lower interest rates and improved housing market sentiment. As interest rates have been stable for some time now, this effect is fading.

All in all, these developments show that the current level of interest rates is well-suited to the circumstances: it supports a movement of inflation towards the target and a gradual recovery of the economy, while also providing stable borrowing and savings rates for households and businesses. At the same time, global economic and geopolitical uncertainty remains high, which may also affect inflation. The ECB therefore remains ready to respond to new developments when necessary.