The European Central Bank's Governing Council voted to cut its deposit rate by 25 basis points at its December 2026 meeting, bringing it to 2.75%. This was the fourth consecutive cut of 2026, completing exactly 100 basis points of easing since the ECB began its cutting cycle in June. ECB President Christine Lagarde described the decision as "the right step at the right time" but declined to pre-commit to further easing.
The inflation picture
Euro-area HICP stood at 2.3% year-on-year in November 2026 — still slightly above the 2% symmetric target but well below the 2022 peak of 10.6%. The ECB's own December projections put average HICP at 2.1% for 2027 and 1.9% for 2028, suggesting inflation is on track to converge to target without further aggressive tightening.
The complication remains services inflation, which printed at 3.8% in November. Services prices track wage growth closely, and euro-area wage settlements for 2026 averaged around 4.2% — above the pace consistent with 2% inflation in the services sector. The ECB's staff noted that services disinflation is "progressing, but slowly". For a detailed look at why services dominate the core, see our services inflation explainer.
Where is the neutral rate?
With the deposit rate at 2.75%, the central question is how much further to cut. The ECB estimates the neutral rate (r*) for the euro area at roughly 2.0–2.5% in nominal terms. If that estimate is correct, the current rate is still mildly restrictive — meaning further cuts are the path of least resistance. But r* estimates carry substantial uncertainty, and if structural factors (green transition, demographics, fiscal expansion) have pushed the neutral rate higher than estimated, the ECB may be closer to neutral than it thinks.
Markets are pricing roughly 50 bp of additional cuts in 2027, which would bring the deposit rate to 2.25%. Lagarde's "meeting-by-meeting" language is designed to preserve optionality: the ECB will cut if incoming data confirms the disinflationary path, pause if services stickiness persists.
Divergence within the euro area
Aggregate HICP conceals wide divergence across the 20 euro-area members. In November 2026, inflation ranged from around 1.2% in Finland and the Netherlands (energy deflation weighing) to above 4% in Slovakia and Croatia (still normalising from post-pandemic surges). A single policy rate cannot be perfectly calibrated to every member state — this is the structural challenge of monetary union. Our euro-area divergence analysis maps the full picture.