ECB leaves interest rates unchanged for the time being

For the fourth time in a row, the ECB has left its official interest rates unchanged. The last rate cut was in June. On previous occasions, ECB President Lagarde had repeatedly stated, "We are in a good place," and that remains the case. The ECB predicts GDP growth for the eurozone of 1,2% in 2026 and 1,4% in the following two years. According to the ECB, inflation will reach 1,9% in 2026, 1,8% in 2027, and 2,0% in 2028. I would characterize such forecasts as a rather flat picture. Of course, Lagarde listed the necessary risks.

I've spent several decades developing economic forecasts and supervised colleagues doing the same for a long time. If someone landed such a flat forecast on my desk, my standard response was that such a flat forecast was improbable and that the forecaster was essentially saying they simply don't know and are hoping for the best.

But that might be too cynical. If the ECB's predictions come true, there's little reason to change the interest rate, as it can be more or less described as "neutral." That is, the interest rate neither stimulates nor hinders activity.

ECB director Isabel Schnabel recently said that the next interest rate move will likely be a hike. Schnabel is one of the more influential ECB directors and is considered one of the "hawks" within the ECB. Lagarde did not confirm this, saying that all options remain open.

The ECB is pleased with economic growth figures of just above 1%. But Germany, the largest economy in the eurozone, continues to struggle. The benchmark Ifo index, which measures business confidence, fell from 88,0 in November to 87,6 in December. This decline was entirely due to the expectations component. It fell from 90,5 in November to 89,7 in December, although this sub-index had improved over the course of the year. The chart below clearly shows that confidence has been structurally lower for several years now than it was between 2011 and 2019.

Germany's hopes are pinned on a more expansive fiscal policy. I often write that it's not that difficult to make an economy grow faster. You just throw a lot of money at it. But that only works temporarily. The key is to structurally increase growth potential. Now, a "Deutschlandfonds" has been launched to mobilize private financing for SMEs. The target is €100 billion, about 2,3% of German GDP. The cynic in me wonders whether the lack of investment is caused by a lack of financing or by an unattractive investment climate. But with Christmas approaching, the cynic in me will have to shut up for a moment.

US figures may be distorted
Now that the US government shutdown is over, the publication of all sorts of economic statistics is picking up again, albeit in fits and starts. I always write this commentary on Friday mornings. The important figures on US job growth are always released in the afternoon of the first Friday of the month. Because of that, I never get to pay attention to them. But this time I did. The labor market figures for October and November were released earlier this week. In October, a net of 105.000 jobs were lost, and in November, the number increased again by 64.000. The decline in jobs in October was caused by a loss of 157.000 federal jobs, another consequence of initiatives to reduce the number of civil servants by offering them attractive leave options. Private sector employment increased moderately in both months. Nevertheless, the latest figures confirm that the US labor market is weakening, though certainly not alarmingly.

The inflation figures for October and November were also published this week. This means only those for the second half of November. Due to the shutdown, the statistical agency had no funds to collect the data. Therefore, there are no figures for October at all. Some components of the inflation figure are estimated, but the usual surveys could not be conducted. Therefore, the index figure for October is the same as the one for September.

It wasn't until November 14th that funding for data collection became available again. This means the November figure was also distorted. Because a reliable index figure for October couldn't actually be calculated, comparing November with October is also pointless. Financial market participants were essentially only given the year-on-year figure for November as relevant information, with the caveat that the figure might be distorted.

Be that as it may, according to the available statistics, inflation was 2,7% in November. This was significantly lower than the 3,1% recorded in September. Core inflation, excluding food and energy, even fell from 3,0% in September to 2,6%, reaching its lowest level since the beginning of 2021. We'll see whether the figures in the coming months confirm this decline or indicate a significant disruption. In the former case, it should be said that the price-raising impact of Trump's import tariffs has been very limited so far. However, I'm reading reports that many producers may adjust their prices relatively sharply in January.

The picture painted by these figures is that inflation is lower than expected and even slightly closer to the Fed's target, while the labor market is weakening. Given that the official interest rate can still be characterized as restrictive, it stands to reason that the Fed will lower interest rates further in 2026.

China is really not doing so well
Chinese policymakers have been trying to adjust their growth model for several years now. Over the past twenty to twenty-five years, the Chinese economy has grown spectacularly. Hundreds of millions of Chinese have been lifted out of poverty. This is admirable and a resounding success. This success was more or less entirely based on exporting industrial goods and investing in infrastructure and housing. But the growth model is broken. Rising protectionism is making exporting more difficult. Moreover, too many houses have been built, and the real estate sector is in crisis. Local governments that made the infrastructure investments are also facing the consequences of excessive debt burdens. Policymakers therefore want to shift to economic growth that relies much more heavily on private consumption growth than before. But that is not easy. Due to the housing crisis, many homeowners are facing negative equity in their properties. Many homes are "underwater." Furthermore, China has only a very modest social safety net. This encourages the population to save.

The figures published this week tell the whole story. In November, house prices were 2,4% lower than a year earlier. House prices have been falling since August 2025. Industrial production is growing, however. In November, the volume was 4,8% higher than a year earlier, compared to 4,9% in October. That sounds robust, but China actually needs higher growth figures to achieve its economic ambitions. Finally, retail sales growth was downright disappointing. In November, it was a meager 1,3% higher than a year earlier. In October, it was 2,9%. That is, of course, far too low if the consumer is the one bearing the burden of growth and the ambition is to grow the economy by 5% per year.

Closing
The ECB is very satisfied with how things are going in the eurozone. The economy is growing at a moderate pace and inflation is more or less in line with the target. Therefore, there is no reason to change the interest rate in the foreseeable future. For the fourth time in a row, the ECB therefore refrained from changing its official interest rates this week.

While the immediate outlook for the eurozone economy may be considered satisfactory, the German economy continues to struggle. German business confidence fell slightly in November, according to the Ifo index. The German government has launched a Deutschlandfonds (Germany Fund) to mobilize private financing for SMEs.

According to the latest figures, the US labor market is weakening and inflation is declining. This paves the way for further interest rate cuts by the Fed. However, there's a significant caveat. Caution is advised when interpreting the latest figures, as they may have been disrupted by the shutdown. In any case, the inflation figures for October are missing.

The latest Chinese figures suggest that the economy isn't performing well either. Industrial production is growing only marginally by Chinese standards, house prices continue to fall, and retail sales growth is disappointing.

This is my last macro commentary of the year. Last week, I announced I would write a commentary on the Wennink report. It hasn't happened yet, but it will happen. I promise. It will be ready before Christmas.

Hans de Jong

Han de Jong is a former chief economist at ABN Amro and now a resident economist at BNR Nieuwsradio, among others. His comments can also be found on Crystalcleareconomics.nl

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