ECB Minutes: Service Inflation and Wage Spikes Kill Rate Cut Speculation

The European Central Bank (ECB) delivered a clear message in its December meeting minutes: the easing cycle is on indefinite pause. The Governing Council expressed confidence that the current policy stance is “well-positioned,” effectively dashing market hopes for rate cuts in 2026.

Sticky Inflation “The Last Mile”

The core concern for Frankfurt remains the “last mile” of disinflation. While headline inflation has stabilized near 2.1%, underlying pressures are alarmingly persistent:

• Service Inflation: Rose to 3.5% in November.
• Wage Shock: Employee compensation surged 4% in Q3, driven by non-negotiated bonuses.

Policymakers fear that premature easing could de-anchor inflation expectations, especially given the resilience of the labor market (unemployment at a historic low of 6.4%).

Growth Surprise

Contrary to the doom-and-gloom narrative often associated with the Eurozone, the economy is outperforming expectations. Q3 GDP expanded by 0.3%, driven by domestic demand. The “economic surprise” index for the Eurozone is at multi-year highs, rendering the argument for stimulus invalid.

Market Reaction & Technicals

OIS (Overnight Index Swap) markets have aggressively repriced. Investors now see the next move as potentially up rather than down, or at least a “high for longer” hold well into 2027.

• Hawkish repricing has supported the EUR on cross-pairs.
• Particularly EUR/JPY, which hit fresh highs above 185.55.

For Forex traders, the ECB has transitioned from a source of volatility to a source of stability. The Euro is now a “carry” candidate against lower-yielding currencies, provided the region can navigate the looming trade friction with the US without sustaining heavy economic damage.