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ECB Signals Caution on April Rate Hike

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European Central Bank policymakers have downplayed the likelihood of an interest rate hike in April, emphasizing the need for more economic data before making any decision. European Central Bank officials noted that while inflation has risen above the 2% target due to higher energy costs, the timing of any policy move is less important than ensuring the decision is well-supported by evidence.

Key voices, including Philip Lane and Francois Villeroy de Galhau, stressed patience. Villeroy said that betting on an April hike would be premature, as policymakers still need clarity on how inflation is affecting underlying prices and economic demand. Markets have also scaled back expectations, now assigning only a small probability to an April move, though a rate increase is still widely anticipated by mid-year.

Other policymakers echoed similar caution, highlighting limited signs that energy-driven inflation is spreading across the broader economy. Officials such as Martins Kazaks indicated that even a small rate hike would mostly serve as a signal rather than a strong policy shift. Overall, the ECB appears inclined to wait for clearer signs of sustained inflation before taking action.

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ECB Warns Inflation Expectations Could Rise Quickly Amid Energy Shock

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A European Central Bank policymaker has warned that inflation expectations in the euro zone could climb faster than previously seen, urging the ECB to remain ready to raise interest rates if price pressures persist. Dimitar Radev said rising energy costs linked to the Iran conflict have pushed inflation above the ECB’s 2% target, increasing risks that higher prices could spread across the broader economy.

Radev noted that the balance of economic risks has shifted in an unfavorable direction, with the likelihood of a more adverse scenario increasing due to ongoing uncertainty and energy market disruptions. Policymakers are concerned that consumers and businesses, still influenced by the inflation surge following Russia’s invasion of Ukraine, may quickly adjust wage and pricing behavior, potentially triggering a self-reinforcing inflation cycle.

While inflation expectations remain broadly anchored and no strong second-round effects are visible yet, the ECB cannot assume stability will continue, Radev said. Financial markets already expect multiple rate hikes this year, though it remains too early to determine whether action will come at the April meeting. The ECB will closely monitor wages, energy prices, economic sentiment, and the duration of geopolitical tensions before making policy decisions.

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Bulgaria Enters Euro Zone, Bids Farewell to the Lev

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Bulgaria officially joined the euro zone on Thursday, marking a historic shift as the euro replaced the lev as the country’s currency from midnight. Celebrations took place across the capital Sofia, with euro coin projections lighting up the central bank’s facade and fireworks welcoming the milestone. Bulgaria becomes the 21st member of the euro area, increasing the number of Europeans using the common currency to over 350 million.

The move grants Bulgaria a seat on the European Central Bank’s Governing Council, allowing it to participate directly in euro zone monetary policy decisions. Successive governments have pursued euro adoption since Bulgaria joined the European Union in 2007. While public opinion remains divided, businesses have largely backed the transition, citing easier trade, travel and financial stability within the EU.

Many citizens expressed cautious optimism, saying the currency change would simplify travel and everyday transactions. However, concerns remain among some Bulgarians about potential price rises and broader political instability, following the government’s recent resignation amid protests over proposed tax hikes. Despite these worries, officials say euro adoption represents a major step toward deeper European integration.

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German Business Confidence Slips Unexpectedly in December, Ifo Survey Shows

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German business sentiment unexpectedly weakened in December, highlighting ongoing struggles in Europe’s largest economy, according to a survey released by the Ifo Institute. The Ifo business climate index fell to 87.6 from a slightly revised 88.0 in November, defying expectations of a rise to 88.2. Commenting on the data, Ifo survey head Klaus Wohlrabe said the year was ending without any positive surprises for the German economy.

Economists said the latest reading reinforces concerns that Germany remains stuck in stagnation after two years of contraction, with only modest growth expected. Analysts noted that the decline aligns with recent drops in purchasing managers’ indexes and indicates that a long-anticipated recovery has yet to take hold. Fiscal stimulus measures announced by the government have so far failed to deliver a meaningful boost, partly due to delays in infrastructure spending and rising costs linked to an ageing population.

Outlook indicators also pointed to growing pessimism among companies for the first half of 2026, while assessments of the current situation remained unchanged. Ifo President Clemens Fuest said the year ended without renewed confidence, and economists added that the lack of broad-based economic reforms has weighed on sentiment. Chancellor Friedrich Merz has pledged further reforms, but businesses remain cautious as tangible policy action has yet to materialise.

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