European Central Bank expected to keep interest rates on hold despite elevated inflation pressures

• A benchmark interest rate of 2.50% is expected to be maintained by the European Central Bank, following two increases so far in 2026. 
• With price pressures still elevated, ECB President Lagarde is likely to signal further monetary tightening.
• Expensive oil and unease over France leave the balance of risks for the euro tilted towards further losses.

Rates on the Main Refinancing Operations (MRO) and Deposit Facility are widely expected to remain at 2.65% and 2.50%, respectively, when the European Central Bank (ECB) announces its decision at 13:15 GMT on Thursday. The announcement will conclude a two-day monetary policy meeting, following September’s increase of 25 basis points (bps) in both rates.

A Monetary Policy Statement will accompany the decision, but attention will centre on ECB President Christine Lagarde’s press conference at 13:45 GMT. Markets will scrutinise her remarks to journalists for confirmation of their expectations for a third interest rate rise in December.

An unambiguously hawkish message from the ECB on Thursday would probably offer the Euro (EUR) some support, although downside risks remain pronounced. Elevated oil prices and investor unease about France’s public finances are weighing heavily on the single currency. Any attempt by Lagarde to temper expectations of a December increase could therefore deal it a substantial blow.

ECB expected to hold interest rates steady

A pause by the European Central Bank on Thursday is almost entirely priced into markets. Having raised rates by a quarter-point in September after an earlier increase in June, policymakers will want to gauge the effect of their latest action before lifting borrowing costs further. Elevated inflationary pressures, however, leave no room for a dovish gesture.

September’s annual eurozone consumer inflation rate reached 3.8%, a three-year high, compared with 3.2% in August. An almost 19% year-on-year rise in energy prices drove the acceleration. Oil, the principal source of inflation, stands roughly 50% above its July lows, and the uncertain, volatile situation in the Middle East makes a sustained period of high prices likely. 

Unchanged core inflation has, by contrast, given the ECB some room for manoeuvre. The bank has also rejected suggestions that there is evidence of strong second-round inflationary effects, reinforcing the argument for holding rates steady. Nevertheless, the sharp rise in headline inflation must have put policymakers on their guard.

Inflation will not be the sole issue before the ECB’s committee on Thursday. A surge in French borrowing costs has alarmed bond markets, widening the spread over the German Bund to levels last seen during the 2009-2011 financial crisis. This has prompted speculation about the ECB’s bond-buying toolkit, specifically its Transmission Protection Instrument (TPI), though activation this week remains a remote prospect.

These competing pressures leave ECB President Christine Lagarde needing to calibrate her language carefully to satisfy all sides. Anchoring inflation remains the bank’s primary objective, obliging her to signal further rate rises over the coming months. Yet recent eurozone figures point to fragile economic growth, while rising bond yields are already tightening financial conditions and reducing the need for an immediate increase in interest rates.

Brown Brothers Harriman analysts note that the ECB’s October survey “showed a further net tightening of credit standards and weaker loan demand in Q3,” adding that this combination “is a headwind to Eurozone economic activity and challenges the nearly 75bps of ECB hikes priced by markets over the next twelve months.”

More than 80% odds of a quarter-point increase in December are embedded in futures prices. The risk, therefore, is that Lagarde strikes an overly dovish tone, potentially eroding speculative support for a euro that is already weak.

EUR/USD faces downside risks around the ECB meeting

Over recent weeks, the euro has weakened against its major counterparts. Investors have retreated from the single currency in October amid worries about the consequences of oil remaining above $100 for an extended period, alongside France’s debt difficulties and the spread of social unrest across the country.

Over the past two months, EUR/USD has shed nearly 5%, reaching 17-month lows just above 1.1100. In that same period, EUR/GBP has fallen by about 2.8%, while EUR/JPY has declined by around 6%.

Such declines underline why a hawkish ECB message on Thursday matters. Expectations for monetary policy alone are unlikely to drive the euro higher, but could relieve some of the selling pressure, particularly alongside an explicit pledge to support France.

Guillermo Alcalá, FX Analyst at FXStreet, considers the euro’s downward cycle overstretched from a technical standpoint. Even so, he notes that “the EUR/USD pair’s inability to return to the upper range of the 1.1200s keeps the negative trend fully in play.”

Initial indications of fading bearish momentum are visible on the daily chart. Although the Moving Average Convergence Divergence (MACD) histogram has moved above zero, the Relative Strength Index (RSI) is still below 40, pointing to an absence of buyers.

Alcalá sets out the conditions for a reversal: “Bulls should break the resistance area at 1.1255, which has been holding upside attempts in October, and shift the focus to the late-June lows, near 1.1325 to confirm a trend reversal,” he says.

Without that move, the FXStreet expert says pressure would build towards the year-to-date trough of 1.1113, followed by 1.1095, the 61.8% Fibonacci retracement of the June-August advance. Beyond those levels lie the late May 2025 lows at 1.1050.