Eurozone inflation hits precise target of 2%, European Central Bank maintains interest rates to strengthen stability logic.

The latest data shows that the inflation rate in the euro area has fallen back to the target range set by the European Central Bank, confirming the policymakers' view that as long as the economic outlook does not change significantly, the benchmark interest rate can be maintained at the current level. Preliminary statistics from Eurostat show that in December of last year, consumer prices in the euro area rose by 2% year-on-year, slightly lower than the 2.1% in the previous month, and completely in line with economists' predictions. Excluding the more volatile food and energy prices, the core inflation rate slowed to 2.3%; the inflation rate in the services sector, which is closely watched by the market, also showed a downward trend. Over the past year and a half, inflation in the euro area has fluctuated around the target level of 2%, allowing the European Central Bank to maintain the benchmark interest rate unchanged since June of last year. Economists and investors generally believe that the ECB will not further adjust interest rates in the short term. Traders have increased their bets on monetary easing, with market pricing indicating a potential cut of 5 basis points before September this year, which translates to a 20% probability of a 25 basis point rate cut. As a result, the euro-dollar exchange rate stabilized around 1.169, reversing the earlier decline. Senior Eurozone economist David Powell said, "The slowdown in inflation in December in the euro area is good news for the European Central Bank, but this change may not be closely related to monetary policy - this downward inflation is driven by lower energy costs, and the decline in prices of volatile commodities such as airfares may be another reason." Currently, most policymakers at the ECB believe that inflation is under control, but they remain cautious about the next steps in policy, emphasizing the continued uncertainty in the global economy. Analysts Anders Svendsen and Tuuli Koivu from Nordea wrote in a report, "We maintain our long-held view: the ECB will keep interest rates unchanged in 2026. In the first half of the year, policy risks lean towards a rate cut rather than a rate hike, and in the long term, they are more inclined towards a rate hike. This view is consistent with current market pricing, and after the release of this inflation data, this view is unlikely to change significantly." At the ECB's final monetary policy meeting in 2025, it was projected that inflation this year would only slightly undershoot the target level, which was revised up from previous forecasts, reflecting a slower pace of cost reduction in the service sector than expected. Previously released data showed that inflation rates in all euro area member states have fallen, but at different rates. In Spain, inflation fell to 3%, in France to 0.7%, and in Germany to the target level of 2%. The inflation rate in the services sector has always been a thorny issue for the ECB. Due to unexpectedly strong wage growth, the service sector inflation rate had temporarily increased. In the third quarter of last year, the most comprehensive wage growth indicator remained at 4%, higher than the range considered consistent with price stability. ECB President Lagarde said last month, "We are closely monitoring this trend." However, she also emphasized that after wages catch up with the post-pandemic rise in prices, wage growth is expected to slow down this year. In addition, several factors could lead to inflation deviating from the target range, including the continued escalation of US tariff policies, a stronger euro exchange rate, and Germany's expansionary fiscal policy. According to the ECB's baseline forecast, the average inflation rate in the euro area will be 1.9% in 2026, and inflation will further decline afterwards, reaching the target level of 2% by 2028.