ECB Annual Report for 2025

In 2025 the ECB succeeded in bringing inflation back in line with its medium-term target of 2%, after a succession of crises - the pandemic, the economic fallout of Russia's unjustified invasion of Ukraine - had driven it to record highs in late 2022.

In response to the largest inflation shock in a generation, the ECB implemented the sharpest tightening of monetary policy in its history, increasing policy rates by a record 450 basis points between July 2022 and September 2023 and pledging to keep rates at sufficiently restrictive levels for as long as necessary.

That tightening worked. Inflation in the euro area fell sharply, and from mid-2024 the ECB began gradually dialling back its monetary policy restriction. At the start of 2025, the disinflation process was well on track and the ECB's projections foresaw inflation returning to target.

But the year brought a major geopolitical shock. The United States, Europe's largest export market, surrounded itself with a tariff wall - a move that threatened to weigh on euro area growth and one that made the inflation outlook considerably more uncertain.

As it happened, the inflationary effects were contained. Europe refrained from large-scale retaliation, and the appreciation of the euro exchange rate dampened imported price pressures.

With inflation continuing on its projected path, the Governing Council was able to continue reducing policy rates, cutting a total of 100 basis points in four consecutive steps to bring the main policy rate to 2.00% by June.

Each decision was guided by the Governing Council's reaction function, based on three elements: the assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. In making its decisions, the Governing Council pursued a data-dependent and meeting-by-meeting approach, without pre-committing to a particular rate path.

The euro area economy, meanwhile, showed surprising resilience to a challenging global environment.

This was partly due to frontloading, as firms rushed to get ahead of the new trade barriers in the early months of the year, giving European manufacturing a temporary lift. That boost faded as tariffs took hold and as manufacturing weakened in the face of competitiveness challenges.

But more fundamentally, the euro area economy was sustained by a genuine strengthening of domestic demand, which more than offset the external shock. Domestic demand fully accounted for growth in 2025.

Perhaps the most encouraging development was in investment.

Business investment expanded at a robust pace, driven by intangible areas - artificial intelligence, software and digitalisation - as Europe's firms embraced digital technology with new urgency. And towards the end of the year, higher German defence spending began to take effect, itself a response to the new geopolitical environment.

Euro area growth reached 1.4% in 2025 - almost one-third stronger than projected at the start of the year, and a testament to the economy's resilience.

Altogether, this allowed the Governing Council to put rates on hold from July onwards. With inflation around our medium-term target, longer-term inflation expectations well anchored and a broadly neutral monetary policy stance, the Governing Council was in a good place and well positioned to respond to future shocks in either direction.

In 2025 the Governing Council also formalised how it would interpret and react to future shocks, through its monetary policy strategy assessment - a collaborative Eurosystem effort completed in June. Narrower in scope than the 2021 review, it incorporated lessons from the shift in the inflation environment and the policy response that followed.

The assessment reaffirmed the symmetric 2% inflation target over the medium term as the cornerstone of the ECB's strategy. And it extended that symmetry to the reaction function: large, sustained deviations from the target in either direction would be tackled with appropriately forceful or persistent action. The Governing Council also underlined the importance of taking into account not only the most likely path for inflation and growth, but also the surrounding risks and uncertainty, including through scenario and sensitivity analyses.

Beyond monetary policy, the ECB made progress across a range of other areas in 2025.

As the debate about reducing regulatory complexity gained momentum in Europe, the Governing Council created the High-Level Task Force on Simplification to develop proposals for streamlining the regulatory, supervisory and reporting frameworks. The task force published its recommendations towards the end of the year, to serve as an input for the European Commission as it prepares a report on the overall situation of Europe's banking system.

There were notable developments in market infrastructure and payments, too.

The Eurosystem Collateral Management System was launched in June, replacing fragmented national platforms with a single system for managing collateral. Euro-denominated instant payments settled through TIPS surged by 132%, following the Instant Payments Regulation's 2025 requirements, which obliged payment service providers in the euro area to be able to receive and send instant payments.

The Governing Council also advanced to the next phase of the digital euro project, focusing on technical readiness, market engagement and the legislative process, with the aim of being ready for a possible pilot exercise in 2027 and a potential rollout in 2029.

Work on the redesign of euro banknotes continued in parallel, reflecting the ECB's commitment to maintaining cash alongside digital money. The Governing Council selected motifs illustrating two possible themes for the next series of banknotes - "European culture: shared cultural spaces" and "Rivers and birds: resilience in diversity" - and launched a design contest for the new banknotes in July.

The quality of the ECB's research continued to earn wide international recognition, a reflection of the excellence of our researchers. The ECB now ranks first in the world in the field of monetary economics according to Research Papers in Economics - a widely used index of economics research.

At the end of the year, the euro area stood ready to welcome Bulgaria as its 21st member, reaffirming the euro's attractiveness at a time of growing geopolitical uncertainty. And support for the euro among euro area citizens reached a record 83% in the spring and remained strong throughout the year.

None of the above would have been possible without the dedication and expertise of ECB staff. This Annual Report provides a detailed account of their work in 2025.