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Eurozone inflation fell to 2 per cent in December, hitting the European Central Bank’s target for the first time since the summer and strengthening the case for interest rates to remain on hold.

The figure was in line with the forecast of economists polled by Reuters and below the 2.1 per cent recorded the previous month.

In December, the ECB held its benchmark interest rate at 2 per cent for the fourth meeting in a row. 

A majority of economists polled by the Financial Times last month do not expect a cut in rates this year. Previously, the ECB halved borrowing costs in eight steps between mid-2024 and mid-2025.

The euro was little changed after the expected number, flat on the day against the dollar at $1.169.

The ECB has predicted that inflation will average 1.9 per cent this year, down from 2.1 per cent in 2025. Growth is expected to be more resilient than previously thought. The central bank’s staff are expecting GDP growth of 1.2 per cent this year, up from a previous estimate of 1 per cent.

Core inflation, which excludes volatile food and energy prices, fell to 2.3 per cent, compared with 2.4 per cent in November.

The closely watched figure for services inflation — a gauge for domestic price pressures that has remained well above the ECB’s 2 per cent target for more than three years — fell by 0.1 percentage points to 3.4 per cent, after rising to its highest level since April in November.

Diego Iscaro, head of European economics at S&P Global Market Intelligence, said December’s inflation figures “are unlikely to move the dial for the ECB” especially with service price inflation remaining above 3 per cent. 

“We still expect the ECB to keep interest rates on hold for the foreseeable future,” Iscaro added.

Expectations of falling inflation have helped push down European government bond yields in recent days. Ten-year German Bund yields were down 0.05 percentage points on Wednesday to 2.8 per cent, their lowest since early December.

Traders are now pricing a small chance of further ECB rate cuts at some point this year, according to levels in swaps markets, having reversed some of their December bets on a rise by the end of 2026.