Will the European Central Bank keep interest rates unchanged as expected despite elevated inflation pressures?

• Expectations favour a pause by the European Central Bank, with its benchmark interest rate likely to stay at 2.50% following two increases so far in 2026. 
• Elevated price pressures are likely to prompt ECB President Lagarde to signal more monetary tightening ahead.
• Downside risks dominate the Euro outlook as expensive oil and worries over France weigh on sentiment.

Markets broadly anticipate no change in borrowing costs when the European Central Bank (ECB) delivers its decision at 13:15 GMT on Thursday, at the end of its two-day monetary policy meeting. Rates on the Main Refinancing Operations (MRO) and the Deposit Facility are expected to remain at 2.65% and 2.50%, respectively. Both were increased by 25 basis points (bps) in September.

While the Monetary Policy Statement will accompany the rate announcement, 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 rate increase in December.

A clearly hawkish message from the ECB on Thursday would probably offer the Euro (EUR) some support, though downside risks remain pronounced. Elevated oil prices and investor unease over France’s fiscal position are weighing heavily on the single currency. Should Lagarde dampen expectations of a December increase, the Euro could take a substantial hit.

Will the ECB keep interest rates on hold?

A pause in European Central Bank policy tightening on Thursday is almost fully priced into markets. Having followed June’s increase with a quarter-point hike in September, policymakers will want to gauge the effects of that latest step before lifting borrowing costs again. Strong inflationary pressures, however, leave no room for an accommodative signal.

Driven by an annual rise of nearly 19% in energy prices, Eurozone consumer inflation climbed from 3.2% in August to 3.8% year-on-year in September, its highest reading in three years. Oil remains the principal source of inflation and trades about 50% above its July lows. With conditions in the Middle East uncertain and volatile, prices are likely to stay elevated for some time. 

Stable core inflation offers the ECB a measure of flexibility. The central bank has also said there is no evidence of strong second-round inflationary effects, strengthening the argument for holding rates steady. Nevertheless, the sharp rise in headline inflation must have put policymakers on guard.

Thursday’s ECB committee discussions will extend beyond inflation. Alarm in bond markets has grown as French borrowing costs surge, widening the spread against the German Bund to levels last seen during the 2009-2011 financial crisis. This has fuelled speculation over the ECB’s bond-buying toolkit, specifically the Transmission Protection Instrument (TPI), though activation this week remains a remote possibility.

Balancing these concerns will require ECB President Christine Lagarde to calibrate her language carefully to satisfy all sides. Anchoring inflation remains the bank’s primary objective, leaving her little choice but to signal further rate increases in the months ahead. Yet recent Eurozone figures point to fragile economic growth. Rising bond yields are also tightening financial conditions already, reducing the pressure for an immediate interest rate increase.

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

Futures markets assign a probability of more than 80% to a quarter-point increase in December. The risk, therefore, is that Lagarde strikes an overly dovish tone, potentially eroding speculative support for the already weak Euro.

Can the ECB meeting ease pressure on EUR/USD?

Investor appetite for the single currency has weakened in October, extending the Euro’s losses against its major peers over recent weeks. Fears about the repercussions of oil staying above $100 for a prolonged period, alongside France’s debt troubles and spreading social unrest, have driven investors away.

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

Such losses underline why a hawkish ECB message matters at Thursday’s meeting. Although monetary policy expectations alone are unlikely to drive the Euro higher, they could moderate selling pressure, particularly if backed by a firm commitment to support France.

Guillermo Alcalá, FX Analyst at FXStreet, considers the Euro’s bearish 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.”

Early indications of fading bearish momentum are visible on the daily chart. The Relative Strength Index (RSI), however, is still below 40, signalling an absence of bulls, even as the Moving Average Convergence Divergence (MACD) histogram has moved above zero.

Alcalá outlines the requirement 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,”

Without that breakthrough, the FXStreet expert expects pressure to intensify towards the year-to-date low of 1.1113, followed by 1.1095, the 61.8% Fibonacci retracement of the June-August rally. Beyond that lies the late May 2025 low at 1.1050.