ECB Insight: December Hold Baked In as Council Prepares to Look Through Early-Horizon Undershooting
16 December 2025
By David Barwick – FRANKFURT (Econostream) – Two days before the European Central Bank’s final monetary policy decision of the year, all meaningful signals point to a unanimous hold, a press conference focused on interpreting the updated projections and managing the risk that a stronger macro outlook is misread as a signal of impending monetary tightening, and a policy outlook that keeps rates at 2% well into 2026 absent a significant shock.
No Governing Council member has publicly pushed for a December move. On the contrary, a string of interventions over the last week has locked in consensus.
Lithuania’s Gediminas Šimkus – who in an interview with us in early September was already an outlier in visualizing a possible December cut – last week said explicitly that there was “no need for a change in interest rates — not only at the next meeting in December but also in further meetings.”
Banque de France Governor François Villeroy de Galhau likewise called it “wise” to keep rates steady, suggesting that even the most dovish voices have shifted to a position of not mere resignation to, but actual comfort with a hold, at least for now.
Our ECB Tone Meter is consistent with this stabilization: the index has moved marginally above zero for the first time this cycle, not just because Executive Board member Isabel Schnabel expressed satisfaction with markets’ expectation that a hike would be the next move, but also because previously dovish members now endorse a hold.
In practical terms, the Tone Meter remains neutral with a slight upward lean, fully consistent with a static policy rate and with downside optionality increasingly constrained.
A unanimous hold implicitly presupposes forecasts without a severe or persistent deviation from target, and policymakers have been at pains to shape expectations accordingly. In retrospect, the extent of that preparatory messaging may prove unnecessary.
Multiple Governing Council members have suggested that neither the new 2028 projection nor any other element of the December forecast exercise is likely to deliver, in the words of one who spoke privately to Econostream, “a substantial reason for us not to be in a good place.”
And just in case the outcome does raise awkward questions, Schnabel’s interview last week—almost certainly given with knowledge of the evolving projection contours—made clear that small, forecast-based deviations can be tolerated.
In her words, if inflation is “slightly below 2%” because of factors such as the ETS2 delay, and if expectations remain anchored, she “would not be concerned.”
Others have struck the same chord: temporary or energy-driven shortfalls are not reasons to adjust the stance. One Governing Council member told Econostream that ETS2 was in essence a one-off increase in the price level rather than a change in the underlying inflation dynamic, and with no clear reason to expect major second-round effects, could be looked through.
The intellectual cover for this has already been provided. Chief Economist Philip Lane’s Ljubljana speech early this month, critically reviewed by us, reaffirmed the symmetry doctrine but also sketched the analytical route for looking through sector-specific and timing-related distortions such as ETS2.
Schnabel applied that logic operationally, emphasizing narrative over last-digit precision. Repeated Governing Council messaging has also elevated inflation expectations — anchored and stable — as the decisive safeguard.
Against that backdrop, a forecast path showing undershooting in 2026 and 2027, with uncertainty around the outer year, is unlikely to trigger any policy response. The Governing Council has prepared markets for the idea that, in a benign macro environment with expectations well anchored, such early-horizon deviations can be treated as tolerable noise.
Still, if the Council is going to look through two consecutive years below 2%, President Christine Lagarde may want or need to explain why. Fortunately for her, most of the language has already been pre-positioned:
- They are “moderate deviations,” within the tolerance band implied by the strategy.
- ETS2 is a level effect, not a shift in underlying inflation dynamics.
- Inflation expectations remain firmly anchored, removing any risk of de-anchoring to the downside.
- The macro narrative is improving, with growth surprising on the upside and the labor market still tight.
Lagarde previewed this at the FT’s Global Boardroom just before the quiet period: “[W]ith a track record of around 2% inflation and a medium-term projection at 2%, I would say again that we are in a good place.” She also hinted directly that growth could again be revised upward, reinforcing the argument that the ECB need not respond to early-horizon undershooting.
We expect the press conference to stress vigilance, but not concern; data-dependence, but not imminence; symmetry, but not mechanistic precision.
Importantly, the near-term risk picture has shifted. Policymakers now refer to growth as “more resilient,” with positive surprises accumulating and tariffs proving less damaging than feared. The labor market remains a source of strength, and fiscal policy is turning more supportive.
As such, Lagarde can plausibly reiterate the “good place” mantra, or even upgrade it to a “better place” or something more imaginative but semantically equivalent. We think there is no clear reason for her to retire the phrase completely yet.
On inflation, the Council’s collective tone has moved toward still-mild upside concern. Services inflation remains sticky; wage dynamics have moderated only slowly; and food prices continue to influence household expectations.
A deflationary impulse from China is emerging as a downside consideration, but views diverge. Latvia’s Mārtiņš Kazāks warned that Chinese exports to Europe are “only going to get worse” and will have “monetary policy implications,” a perspective shared, in different forms, by Vice President Luis de Guindos, Executive Board member Piero Cipollone, Lane and Villeroy.
By contrast, Schnabel said last month that “this risk hasn’t really materialized,” and has for many months expressed confidence that, if it did, the European Commission would respond.
Another Council member told Econostream that Chinese goods prices cannot fall indefinitely and therefore would not generate a self-reinforcing disinflationary dynamic. Any impact from this channel, he said, would be a relative price adjustment that the ECB could look through.
Taken together, Lagarde can continue to assess inflation risks as “more balanced,” and similarly, that “the downside risks to growth have abated” further. We would hesitate to infer from the likely improvement in the growth outlook that she will identify the balance of these risks as being to the upside, as that could be too easily interpreted as validating tightening expectations, which we don’t think she will want to do.
Meanwhile, no policymaker has opened the door to a renewed easing cycle. Schnabel was explicit that in the absence of larger shocks, interest rates are “in a good place” and likely to stay there “for some time.” Kazāks, Šimkus and Villeroy have all reinforced this assessment.
The bar for cuts is therefore very high:
- A material deterioration in activity or credit conditions.
- A meaningfully lower medium-term inflation outlook.
- A financial shock severe enough to overwhelm the current resilience narrative.
- A sharp decline in external demand not offset by domestic strength.
- A disinflationary impulse from abroad — for example, if a structurally more dovish Federal Reserve weakens the dollar, strengthens the euro and thereby leads to imported disinflation.
Conversely, several plausible developments could eventually justify a hike — though not imminently. If growth and investment continue to overshoot expectations, if r* is indeed drifting higher, or if underlying price pressures prove stickier than projected, the current stance could become too loose over time.
For now, however, the ECB is content. Quantitative normalization continues quietly in the background, and no one is advocating changes to the balance-sheet runoff.
The December meeting will therefore be a non-event on rates but an important event in communication. The ECB is set to validate a forecast likely to show some early-horizon undershooting while converging toward target further out — and to argue, plausibly and with the groundwork already laid, that this does not threaten medium-term price stability.
The Council is united behind a hold, the stance is seen as appropriate, known risks are manageable, and unless the macro narrative shifts materially, policy looks set to remain on a stable plateau for some time.
We said following the last press conference that “2% still looks like the terminal rate.” It is now increasingly natural to treat it as such, given the extremely limited appetite for further easing. As always, of course, a shock could change that — in either direction.