European shares close higher as ECB keeps rates unchanged

The pan-European STOXX 600 closed 0.51% higher at 555.13 points, with the region’s aerospace and defence index hitting an all-time high, up 2.5%

European shares closed higher on Thursday as a rally in defence stocks helped lift the main index, with investors taking in a widely anticipated European Central Bank (ECB) decision to keep interest rates unchanged.

The pan-European STOXX 600 closed 0.51% higher at 555.13 points, with the region’s aerospace and defence index hitting an all-time high, up 2.5%.

Defence stocks led index gains as investors weighed ongoing geopolitical tensions in the eastern part of the continent after Poland shot down a suspected Russian drone earlier in the week.

BAE Systems climbed 6.3%, Rheinmetall added 2.3% and Rolls-Royce rose 2.1%.

The more we get these little touch points of continued reminders that there’s ongoing uncertainty, the more investors are simply saying I need to have these defence stocks in my portfolio, said Daniel Coatsworth, chief investment officer at Moneyfarm.

Meanwhile, the ECB left interest rates unchanged on Thursday as expected but offered no clues about its next move, reiterating that the following decision will be data-dependent.

The central bank also lowered inflation forecasts to 1.9% in 2027, below the 2.0% projected in June, while core inflation is seen at 1.8% then, both below the 2% target.

Traders curbed their bets on another rate cut, seeing just under a 50% probability of a cut by June 2026, according to ICAP data. Declining bets supported the euro, which was last up about 0.3% against the dollar.

The ECB appears confident that the economic bloc can withstand the impact of President Trump’s tariffs for some more time, when it decided to hold the deposit rate unchanged at 2%, according to Richard Flax, chief investment officer at Moneyfarm.

Germany’s two-year bond yield, vulnerable to interest rate expectations, was up 4 bps to 1.99%.