The European Central Bank reduced its deposit facility rate by 25 basis points to 2.75% at its January 2026 meeting, the third cut since the easing cycle began in June 2024. ECB President Christine Lagarde said the decision reflected "continued progress on disinflation" and a need to support the eurozone's fragile economic recovery. The main refinancing rate was lowered to 3.15%.
Inflation Progress
Eurozone headline inflation fell to 2.1% in December 2025, close to the ECB's 2% target for the first time since mid-2021. Core inflation, which excludes energy and food, remained more stubborn at 2.7%, driven by services price growth of 3.4%. The ECB's staff projections estimate that inflation will reach the 2% target sustainably by mid-2026.
Energy prices, which were the primary driver of the inflation spike in 2022-2023, have normalised. European natural gas prices (TTF benchmark) averaged approximately 30 euros per megawatt-hour in late 2025, well below the August 2022 peak of 340 euros.
Economic Growth Concerns
The eurozone economy grew just 0.8% in 2025, weighed down by Germany's industrial recession. Germany, the bloc's largest economy, contracted 0.2% in 2025, its second consecutive year of negative growth. The German manufacturing sector has been hit by high energy costs, competition from Chinese manufacturers, and weak demand for automobiles.
France grew 0.9%, while Spain was the standout performer with 2.4% growth, driven by tourism and a construction recovery. Italy grew 0.6%. The divergence between member states has complicated the ECB's policy decisions, as a single interest rate must serve economies with very different conditions.
What Traders Expect Next
Market pricing via interest rate swaps suggests traders expect two more 25-basis-point cuts in 2026, bringing the deposit rate to 2.25% by year-end. This would bring the ECB's policy rate closer to the estimated "neutral rate" of approximately 2%, the level that neither stimulates nor restricts economic growth.
The euro traded at approximately $1.04 against the US dollar following the decision, near two-year lows, reflecting the widening interest rate differential with the Federal Reserve, which has kept its rate at 4.25-4.50%.
For ECB policy decisions and press conferences, visit the ECB press releases. For eurozone economic indicators, see Eurostat.