ECB keeps rates unchanged but points to inflation risk

Updated / Thursday, 29 Oct 2026 15:37

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The European Central Bank left interest rates unchanged in a well-telegraphed move today but warned that inflation risks were on the rise from surging energy costs, which may solidify market bets for a December rate hike.

The ECB has raised rates twice this year to prevent an Iran war-induced energy price jump from getting entrenched and has signalled that more may be needed, even if it was not in a hurry without evidence of dangerous second-round inflation effects.

In a decision published only hours after ECB President Christine Lagarde announced she would step down early, the ECB warned risks to inflation were skewed to the upside given a recent surge in oil and gas prices.

"Energy prices have continued to rise, posing upside risks to the inflation outlook and downside risks to the growth outlook," the ECB said in a statement.

It added that underlying inflation had remained "broadly stable" and wages had not shown "a material response" to higher prices although "the increased magnitude and duration of the energy shock" were likely to drive up inflation and undermine growth.

Deteriorating financing conditions, particularly in France, may complicate the bank's next decision.

Borrowing costs have increased sharply in recent months and the flow of credit is expected to slow, putting a brake on economic growth.

This achieves the sort of policy tightening an ECB hike would accomplish but also risks financial turbulence as France now has to pay a decades-high 155 basis point premium over Germany to borrow for 10 years.

"Financing conditions have tightened since the Governing Council's last meeting, which is likely to weigh on inflation and growth," the ECB said.

This suggests the ECB will need to walk a narrow path in the months ahead.

It must prevent high inflation from becoming embedded as price growth is already twice its 2% target. But it wants to avoid setting off turbulence in markets that could induce a recession or broader financial instability.

This is why the vast majority of economists polled by Reuters see just one or two more hikes before the ECB ends the current tightening cycle.

During her press conference this afternoon, European Central Bank President Christine Lagarde said she was stepping down early from her post to have more "freedom to engage on matters that are not monetary policy matters".

Lagarde said she wanted more "freedom of speech", in comments that will fuel speculation she intends to intervene in next year's presidential election in her native France.

She also said that the ECB had discussed whether to hike interest rates today but decided to keep them on hold as underlying inflation is stable.

"The governing council debated whether a hike was appropriate," she said, but added that given heightened uncertainty and stable core inflation - stripping out food and energy costs - policymakers decided unanimously to keep borrowing costs unchanged.

When asked whether policymakers might intervene to support the under-pressure French bond market, she said the ECB has "instruments" to deal with "disorderly market movements".

"Should market developments threaten the smooth transmission of our monetary policy, including through unwarranted and disorderly market movements, we have instruments available to respond," she said, while stressing certain criteria must be met for the ECB to step in.

Reuters reported this month that the World Economic Forum could appoint Lagarde as its next chair as soon as November, hastening a wider reshuffle at the top of the ECB.