ECB leaves interest rates at 2.5% as inflation pressures persist

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ECB leaves interest rates

Highlights

ECB holds its deposit rate at 2.5%.
Eurozone inflation reaches 3.8%.
December rate hike to 2.75% remains possible.

The decision followed a 25-basis-point increase in September and was unanimously supported by the ECB's Governing Council. CNBC reported that officials had discussed another rate increase but concluded that stable underlying inflation and growing economic uncertainty justified keeping borrowing costs unchanged.

Energy inflation complicates the rate outlook

Eurozone headline inflation reached 3.8% in September, its highest level since September 2023, while energy inflation accelerated to 18.8%. The increase reflects disruptions linked to the conflict involving Iran, which has pushed up oil, natural gas, and refined fuel prices across Europe.

ECB President Christine Lagarde said the central bank had not detected significant additional inflationary effects beyond those included in its September forecasts. Wage growth and underlying price pressures have remained broadly stable, reducing the immediate need for tighter monetary policy despite elevated energy costs.

Financial conditions have also tightened without further intervention from the central bank. Average 10-year sovereign borrowing costs have increased by approximately 35 basis points since the previous meeting, adding pressure on governments and businesses. Higher financing costs could help contain inflation but also threaten an already fragile economic recovery.

Economic growth faces pressure from higher costs

The eurozone economy continued expanding during the third quarter, supported by improving services activity and investment in technology. Manufacturing, digital services, and exports have benefited from artificial intelligence-related spending, while government investment in infrastructure and defense has provided additional support.

However, sustained energy inflation threatens household purchasing power and consumer confidence. Businesses also face higher operating expenses and financing costs, potentially weakening investment and employment if the conflict continues.

The ECB has raised rates twice since June, when it began tightening monetary policy for the first time since 2023. Its latest decision reflects concern that additional increases could place unnecessary pressure on economic activity before the effects of earlier moves become clear.

December rate decision and leadership change draw attention

Investors are now focused on the ECB's December meeting, when updated economic projections could determine whether further tightening is necessary. Deutsche Bank economist Mark Wall expects another 25-basis-point increase to 2.75%, potentially marking the end of the current tightening cycle.

The outlook is complicated by Lagarde's announcement Thursday that she intends to leave the presidency early. Her departure introduces uncertainty over future policy leadership, although the Governing Council's collective decision-making structure should provide continuity.

With inflation at 3.8% and energy costs rising sharply, the ECB must determine whether existing monetary restrictions are sufficient to prevent temporary price pressures from becoming persistent.

As we previously reported, Warsh keeps December rate hike in play as Fed holds steady.

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