Monetary policy goes on a (holiday) break
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Article Type
Insights
Topic
Opinion
Published
December 22, 2025
Read time
5 mins
Author
Irina Kurochkina, CFA
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After final ECB meeting of the year, financial markets enter a seasonal lull with less economic data prints and lower market liquidity. Central bankers will also enjoy a break from making monetary policy decisions, and this break can actually last for a while.

 

The end of 2025 marks an end to a largely synchronized global rate cutting cycle. In most core markets, key policy rates have been on a normalization path for the last two years, following their jump in 2022-2023 when many central banks had to hike rates aggressively to fight resurgent inflation. It was an exciting and uncertain period for investors, but also for central bankers, who were tested on their ability to delivery on their core mandates of keeping price pressures under control. Economy-weighted world inflation has come down significantly, from around 10.5% in  November 2022 to about 3.5% in November 2025. The last bit of inflation has proved more difficult to overcome in some regions, but when it comes to euro area inflation, it has moved very close to the ECB’s target. The latest CPI reading was 2.1%, with Core CPI at 2.4%. Compared to the last few years, policymakers in Frankfurt can go on a holiday break with much more confidence in their policy execution.

 

In the final Governing Council meeting in 2025, the ECB staff projections for both GDP growth and inflation were revised slightly upwards, in line with market expectations. It reflects that the European economy was able to withstand global uncertainty and the impact of US tariffs better than originally anticipated. The ECB expects that the eurozone economy to grow by 1.4% in 2025, then slightly slower at 1.2% in 2026 before returning to 1.4% growth in 2027 and 2028. The upward revision to GDP forecast was mostly attributed to robust  domestic demand, as well as the surprising strength of exports and AI-related investments.

 

On the inflation side, price pressure in services have proved to be somewhat sticky, but this is closely related to wage increases which are expected to ease into the new year. For 2025, the projections still showed 2.1% headline inflation, which is comfortably close to the 2% policy goal. For 2026 and 2027, the ECB forecasts inflation even below its target, at 1.9% and 1.8% respectively. Only in 2028 inflation is expected to return to 2%. The small deviation from target is something that the ECB is likely to tolerate and not react with rate changes in the absence of other triggers.

 

The monetary policy outlook in Europe is to a large extent driven by fiscal spending, especially in Germany, unpredictable changes in global trade policies, and a stronger euro. The risk assessment by the ECB continues to highlight a volatile international environment that could cause inflation to deviate from projections. Current market pricing implies that the ECB will stay on hold throughout 2026, and this view is hard to challenge given the data at hand. However, this does not mean that the European rates market will be calm. Because of the volatile global environment, we expect 2026 to be just as eventful for central bank watchers. But for now, the ECB can afford to pause interest rate changes and truly embrace the festive break, allowing investors to step back and regroup for the year ahead.

Disclaimer

Author

Irina Kurochkina, CFA
Portfolio Manager

Irina Kurochkina, CFA, is a portfolio manager in the fixed income, LDI and investment solutions team with a focus on sovereigns.

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