ECB holds rates at 2.50% as annual inflation accelerates to 3.8%
Key Facts
The European Central Bank kept all three interest rates unchanged on 29 October, holding the deposit rate at 2.50%, the main refinancing rate at 2.65% and the marginal lending rate at 2.90%. The decision came as annual euro zone inflation rose to 3.8% in September from 3.2% in August. The bank said persistently rising energy prices were increasing inflation risks and lowering growth expectations. It also said the full impact of the energy shock had yet to emerge and that wages had not materially responded to it so far. On the day of the decision, the bank announced that Christine Lagarde would step down as president on 7 February 2027.
The acceleration in headline inflation was driven by a jump in energy prices; annual energy inflation rose to 18.9% in September from 14.3% in August. Inflation excluding energy rose to 2.3% from 2.1%, while services inflation climbed to 3.2% from 3.0%. By contrast, goods inflation eased to 1.1% from 1.2%. The bank said energy prices had moved above the baseline path in its September projections. It said this was likely to add to inflation in the near term and keep it well above target over the coming quarters.
The bank sees the energy shock as creating opposing risks for prices and economic activity, saying that continued price increases raise inflation risks and lower growth expectations. It added that the shock’s full impact had yet to emerge, while wages had not shown a material response so far. Employee compensation grew 3.3% year on year in the second quarter, slowing from 3.6% in the first quarter. The bank’s wage tracker points to negotiated wage growth of between 2.5% and 2.8% over the remaining months of 2026, and an average of 2.6% in the first three quarters of 2027. The bank said easing energy inflation, alongside the effects of higher interest rates, should help inflation return to target later on.
The euro zone economy continued to expand in the third quarter, the bank said in its assessment, noting that services and exports had received support from business investment related to artificial intelligence. That puts activity indicators alongside the bank’s warning that energy prices are weighing on growth expectations. The Governing Council reaffirmed its commitment to stabilising inflation at its 2% medium-term target. The bank said policy decisions would be data-dependent and taken meeting by meeting, with no advance commitment to a particular rate path. The bank raised all three interest rates by 25 basis points on 10 September, bringing them to the levels it left unchanged in October.
The bank’s September projections outlined a path in which inflation was expected to decline gradually after 2026, with headline inflation averaging 3.0% in 2026, then 2.5% in 2027 and 2.1% in 2028. The projections put economic growth at 0.9% in 2026, 1.4% in 2027 and 1.5% in 2028. But the bank said at its news conference that energy prices had moved above its baseline projection path and that inflation could rise further in the near term. Reuters reported that the bank raised rates twice during 2026 to prevent the effects of an energy price spike linked to the war with Iran from becoming entrenched. The report added that the hold decision could strengthen market bets on another increase in December if evidence emerges that the shock is feeding through to inflation.
In a separate assessment reported by Reuters, Conor Barlow, Fidelity’s euro zone analyst, said a next increase to 2.75% in December was likely. Barlow said broad indicators of financial conditions had tightened noticeably and that the bank would remain vigilant. In foreign exchange markets, the euro closed at 1.11623 against the dollar on 29 October, according to EL7 data.
U.S. data for September showed the personal consumption expenditures price index rising 0.5% month on month, while the core index, excluding food and energy, rose 0.3%. Consumer spending in current dollars also increased by 113.1 billion dollars, while real spending rose by 2.6 billion dollars, less than 0.1% month on month. U.S. personal income and spending data for October are due to be released on 25 November. The European Central Bank’s next monetary policy meeting will be held on 16 and 17 December, with a news conference following the second day’s meeting.