ECB keeps rates on hold as financial conditions tighten and energy costs climb

The deposit rate remains at 2.50%. With policymakers weighing renewed increases in energy prices, the European Central Bank (ECB) unanimously kept all three key interest rates on hold. According to President Christine Lagarde, the Governing Council considered whether a rate increase was warranted before deciding that a measured approach was still justified for now.

Energy prices have exceeded the ECB’s baseline assumptions, the central bank acknowledged, raising upside risks to inflation and downside risks to growth. Although headline inflation will likely stay well above target over the next few quarters, the ECB expects a subsequent decline as energy inflation subsides. Meanwhile, underlying inflation has been broadly steady. Wages have shown no material second-round response, and longer-term 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. Lagarde also highlighted early pricing-chain data signalling fresh upward pressure. While indirect effects from the energy shock are becoming more evident to the central bank, it sees no further second-round effects beyond those already reflected in its projections.

Signals on the growth outlook remain mixed. Recent data point to economic expansion in the third quarter, supported by AI investment, government spending and a possible export recovery. Against this, demand faces pressure from higher energy prices, increased financing costs, weaker confidence, fiscal uncertainty and tighter financial conditions, all of which are dampening demand. Growth risks remain skewed to the downside, whereas inflation risks are still skewed to the upside.

Taken together, the outcome was a slightly hawkish but cautious hold. Without committing in advance to an interest-rate path, the Governing Council will base its decision closely on underlying inflation and monetary policy transmission. Lagarde characterised the six weeks until the next meeting as a period rich in information. This suggests that the December decision will hinge heavily on whether energy pressures spread more broadly or stay contained.