By Paul Hannon
Five of Europe's central banks will announce policy decisions Thursday, but investors expect only one of them to mirror the Federal Reserve by lowering borrowing costs: the Bank of England.
The European Central Bank hasn't changed its key rate since June, and believes itself to be in a "good place," with the eurozone economy having avoided a tariff-induced recession and inflation close to its target.
But the BOE is not in a good place. As in the U.S., changes in government policy contributed to a pickup in inflation that was absent in the rest of Europe. Some on the nine-member Monetary Policy Committee remain cautious, and worry that the unexpected revival of inflation so soon after the 2022 surge will raise expectations of future price rises and wage demands.
Their view prevailed in a 5-4 vote to leave the key rate unchanged in November. But at the same time, the U.K. economy has flatlined and the jobs market has cooled. Some MPC members fear a slide into recession if the central bank continues to restrain activity.
The decision is expected to be close, with the two four-member camps set to repeat their November votes. However, investors expect BOE Governor Andrew Bailey to switch sides, and swing it in favor of a cut to 3.75% from 4%.
At the November meeting, Bailey signaled he would be open to a December move if there were clear signs that inflation is cooling from its September peak of 3.8%. Those signs have been abundant in recent weeks. Additionally, the government outlined measures that BOE economists estimate could cut the inflation rate by as much as half a percentage point in 2026.
"Since the budget, we have lowered our inflation projections meaningfully," said Sanjay Raja, an economist at Deutsche Bank. "Not only have oil and gas prices dropped since our last inflation update, but also the budget has pushed through a meaningful amount of disinflation."
While the BOE might finish the year as an outlier among European central banks, many investors expect it to soon join its peers in holding the key rate steady for an extended period.
However, some economists expect to see more activity as inflation falls more rapidly than previously anticipated, with Andrew Wishart at Berenberg Bank now seeing three cuts after Thursday's anticipated move, bringing the key rate down to 3% by July 2026. He had previously forecast a terminal rate of 3.5%.
With the ECB seen as almost certain to leave its key rate at 2%, the focus will be on the signals about future policy contained in new economic forecasts.
The central bank's economists will likely continue to expect inflation to fall below the 2% target next year. ECB President Christine Lagarde last week said growth estimates will be raised, and that suggests economists will forecast a return to target for inflation, but possibly not until 2028. In part, that delayed return to target reflects the European Union's decision to delay the introduction of new measures designed to cut carbon emissions from road transport.
On the face of it, that doesn't look like a scenario that calls for much change from the ECB.
"For now, we see the "good place" messaging staying in place, and ECB policy rates also remaining where they are throughout 2026," said Sandra Horsfield, an economist at Investec.
The Swiss National Bank last week left its key rate unchanged for the second straight meeting. Sweden's Riksbank, the Czech National Bank and Norway's Norges Bank are also expected to hold rates steady Thursday.
With the possible exception of the BOE, it looks as if the cycle of European rate changes that began with big hikes from mid-2022 and more gradual easing from mid-2024 is coming to an end.
But there is a wild card. The Federal Reserve could yet embark on a more aggressive series of rate cuts than markets expect, further weakening the U.S. dollar to a degree that threatens to push inflation lower in Europe. With inflation already set to remain below target for an extended period, that would not be a development the ECB could afford to ignore.
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
December 15, 2025 02:00 ET (07:00 GMT)
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