Despite inflation sitting comfortably below the European Central Bank’s 2% target and economic momentum across the euro area remaining fragile, the ECB has left interest rates unchanged, signally firmly that the period of monetary loosening is over.
For businesses, the decision delivers a welcome dose of stability. An end to further rate decreases reduces uncertainty around financing costs and allows firms to forward plan with great confidence, particularly in terms of investment, hiring, and pricing strategies, even if it does not provide an immediate boost to demand.
While borrowing remains more expensive than in the pre-pandemic era, the absence of additional tightening lowers the risk of a further squeeze on cash flow, particularly for small and medium-sized enterprises. Projects delayed during the period of rapid rate rises can now be reassessed.
Economic growth is expected to gradually emerge in 2026, even if consumer demand remains cautious and investment has yet to recover convincingly.
A rise in the manufacturing PMI in January for the bloc’s two largest economies - Germany and France - is one of a number of signs that confidence could grow across the year. The prospect of recovery is enabling the ECB to prioritise credibility and inflation control over drastic short-term stimulus.
The ECB is choosing predictability over policy activism, offering firms a clearer operating environment as they navigate a slow but potentially more stable phase of the European economic cycle. The ECB is looking to support growth - but not at any cost.
