Eurozone Energy Inflation Jumps to 18.9% as ECB Holds Rates
Key Facts
The European Central Bank left its key interest rates unchanged on October 29, as eurozone energy inflation jumped to 18.9% year on year in September from 14.3% in August. The bank held the deposit rate at 2.50%, the main refinancing rate at 2.65% and the marginal lending rate at 2.90%. In the same month, headline inflation rose to 3.8% from 3.2%, while inflation excluding energy climbed to 2.3% from 2.1%. These figures put the energy shock at the center of the bank’s calculations, as it puts pressure on prices while also increasing the risks of slower growth. The bank said monetary policy decisions would continue to depend on an assessment of the data at each meeting.
The bank said the increased scale and duration of the energy shock could push inflation higher and reduce growth through its indirect and second-round effects. It also said energy prices had exceeded the baseline path assumed in its staff projections published in September. The bank expected this to raise inflation in the near term and keep it well above target over the coming quarters. At the same time, it said wages had not, up to that point, shown a material response to the energy shock and underlying inflation had remained broadly stable. The bank said: "The increased scale and duration of the energy shock, together with the implications of indirect and second-round effects, are likely to push inflation up and growth down."
The divergence between accelerating headline inflation and inflation excluding energy holding at 2.3% reflects that rising energy prices were the clearest driver of the price increase in September. But the bank linked the risks to how long the shock lasts and the possibility that it will spread from energy costs to other prices and wages. It said the conflict in the Middle East and recent developments in Russia’s war on Ukraine were upside risks to the inflation outlook. It said a continued rise in energy prices could intensify these pressures. The shock’s implications for growth remain part of the monetary policy trade-off, as the bank warned that higher energy prices could push activity in the opposite direction from prices.
In its September projections, the bank forecast eurozone economic growth of 0.9% in 2026 and 1.4% in 2027. It accompanied its baseline projections with three updated alternative scenarios for the energy shock, versions of which it had previously included in its June 2026 projections. The bank said the alternative scenarios reflected the uncertainty surrounding the conflict and its economic implications. In activity data, the eurozone economy grew 0.4% quarter on quarter in the third quarter, while annual growth was 1.3%. Quarterly growth offers a picture of economic activity alongside rising price pressures, without changing the bank’s statement that interest rate decisions would be made based on available data.
The bank is maintaining its data-dependent approach, making decisions meeting by meeting, and said it was not committing in advance to a specific interest rate path. Reuters, via Investing.com, reported that most economists surveyed expect one or two further rate increases before the current tightening cycle ends. Reuters said the bank had raised rates twice during 2026 through October 29, in an effort to prevent the energy price shock linked to the war from becoming entrenched in inflation. It also noted that borrowing costs could complicate the decision, with the French 10-year borrowing premium over Germany reaching 155 basis points on October 29, its highest level in decades. The bank will hold its next monetary policy meeting in Frankfurt on December 16 and 17, with a news conference on the second day.