ECB recap: Rates held steady as energy costs rise and financial conditions tighten

Renewed increases in energy prices prompted a cautious policy stance at the European Central Bank (ECB), which unanimously kept its three key interest rates on hold, including the deposit rate at 2.50%. According to President Christine Lagarde, the Governing Council considered whether a rate hike was warranted before deciding that a measured approach was still justified for now.

With energy prices exceeding its baseline assumptions, the ECB recognised greater upside risks to inflation and downside risks to growth. Although headline inflation is likely to stay well above target over the coming quarters, the central bank expects a subsequent decline as energy inflation moderates. Meanwhile, underlying inflation has been broadly steady. Wages have shown no significant second-round response, and longer-term inflation expectations remain near 2%.

Negotiated wage growth is indicated at 2.5%-2.8% for the remaining months of 2026 by the ECB’s wage tracker, while Lagarde noted that early pricing-chain data signalled fresh upward pressure. Although indirect effects from the energy shock are becoming more evident to the central bank, it has observed no further second-round effects beyond those already factored into its projections.

Signs of third-quarter economic expansion sit alongside a mixed growth outlook. AI investment, government expenditure and a possible export recovery are supporting activity, according to incoming data. At the same time, higher energy prices and financing costs, weaker confidence, fiscal uncertainty and tighter financial conditions are all curbing demand. Growth risks remain skewed to the downside, whereas the balance of inflation risks is still to the upside.

Taken together, the outcome amounted to a cautious hold with a slightly hawkish tilt. Without committing in advance to an interest-rate path, the Governing Council will closely base its decision on underlying inflation and monetary policy transmission. Describing the six weeks leading up to the next meeting as information-rich, Lagarde suggested that the December decision would hinge largely on whether energy pressures spread or stay contained.