The European Central Bank is poised to keep policy rates unchanged in its upcoming decision, signaling limited near-term appetite for cuts as the euro area economy stays resilient amid global trade shocks and inflation remains around the 2% target.

Inflation projections were nudged higher for the coming years, with services inflation expected to decline more slowly than previously anticipated.

In December, the ECB revised its macro projections: 2024 growth at about 1.4% (up from September), 2025 growth around 1.2% (up), with 2027 and 2028 growth at roughly 1.4%.

External risks discussed include potential US tariffs on European goods, EU regulatory actions in the digital sector, and Ukraine-related volatility that could disrupt supply chains and demand.

Christine Lagarde is expected to brief the press later, potentially shedding light on future policy steps.

Lagarde noted there will be no forward guidance due to geopolitical and trade uncertainty, especially at Europe’s borders.

Considerations include potential impacts from delayed carbon trading schemes on headline inflation and euro/dollar exchange-rate dynamics affecting competitiveness and inflation prospects.

The context includes how rate policy affects borrowing costs, housing and business investment, with higher rates aimed at curbing inflation and lower rates to stimulate demand.

Drivers of stronger growth cited include robust domestic demand, a tight labor market, rising exports (notably pharmaceuticals), services activity, and investments in AI and related infrastructure.

Inflation risks include expansive German fiscal policy for 2025 that could generate new inflationary pressure, complicating the policy path.

Trade developments with the United States, including a 15% tariff settlement, reduced uncertainty and improved business planning, supporting a more favorable euro-area outlook.

Analysts say the tariff agreement and reduced trade uncertainty have helped exporters and overall planning, contributing to the more favorable growth backdrop.