European Central Bank Maintains Key Interest Rate at Two Percent

The European Central Bank (ECB) has decided to keep its key interest rate steady at two percent, maintaining its current monetary policy stance. This decision follows a series of eight rate cuts since the previous year, implemented in response to easing inflationary pressures within the eurozone. The latest inflation figures indicate a rate of 2.2 percent across the currency bloc, closely aligning with the ECB's stated target of two percent. Since July, the interest rate has remained unchanged as inflation nears the desired level.

In parallel with interest rate policy, the ECB is advancing its plans for a digital euro. The central bank aims to introduce this digital alternative to cash by 2029, provided a suitable legal framework is established in time. The ECB's governing council, during its recent meeting in Florence, reaffirmed its commitment to continue preparations for a digital euro, independent of ongoing political negotiations regarding regulatory approval.

If relevant legislation is enacted by 2026, the ECB expects to launch a pilot project for the digital euro in 2027. The Eurosystem, which comprises the ECB and national central banks of the euro area, would then be positioned to issue the digital euro by 2029. Preparation efforts involve collaboration with payment service providers, merchants, and consumers to ensure the digital euro is practical for everyday transactions. Initial test transactions could begin as early as mid-2027, contingent on the establishment of the necessary legal framework.

The ECB has been exploring the concept of a digital currency for several years, focusing on technological solutions and data privacy. In November 2023, the central bank initiated a two-year preparatory phase to further develop the digital euro. The envisioned system would allow consumers to hold digital euros in a secure digital wallet, enabling instant, round-the-clock payments via smartphones and other devices.

The entire project is estimated to cost approximately 1.3 billion euros by 2029, according to the ECB. Ongoing operational expenses are projected at around 320 million euros annually after the initial rollout. The aim of the digital euro is to provide a European alternative to existing digital payment services--many of which are dominated by private companies based outside the EU, such as Paypal, Mastercard, and Visa.

Despite the move towards digital currency, both the ECB and the European Commission have emphasized that cash will remain in circulation. Proposals for the digital euro specify that it would become legal tender, but would not replace coins and banknotes. Legislation is also being considered to ensure continued broad acceptance and availability of cash throughout the European Union.

Some industry observers and critics have questioned whether the development of the digital euro is the most effective approach, suggesting that efforts might be better directed towards expanding existing European payment solutions such as Wero. Wero, launched in July 2024 by a consortium of European banks and payment providers, is currently available in Germany, France, and Belgium as a pan-European payment service.