A man walks past the euro currency symbol (‘Euro Sculpture’ by German artist Ottmar Hoerl) in front of the former European Central Bank (ECB) building in Frankfurt am Main, western Germany, on June 9, 2026.
Kirill Kudryavtsev | AFP | Getty Images
The European Central Bank decided on Thursday to keep interest rates unchanged in line with market expectations, despite inflation in the euro zone rising to a three-year high.
The central bank’s main interest rate, the deposit facility, remained unchanged at 2.5%, following a 25 basis point increase in September.
The agency’s board said in a statement that while rising energy prices pose an upside risk to the inflation outlook and a downside risk to growth, underlying inflation and wages have remained broadly stable so far.
ECB President Christine Lagarde told CNBC’s Annette Weisbach at a press conference that she “does not see any impact of the second round on top of what is already included in the forecasts” announced in September.
Lagarde cited rising energy costs across oil, gasoline, fuel, gas and refining margins as the main developments since the last ECB Governing Council meeting, as well as a sharp rise in long-term financing costs, with average 10-year sovereign yields rising by about 35 basis points.
“Taking these two factors together, the Board did indeed debate whether raising rates was appropriate, but based on the accumulating and rising uncertainty and underlying inflation that remains broadly unchanged, the Board unanimously decided that at this stage we are well placed to maintain policy and that the current cautious approach remains appropriate,” Lagarde said.
Money markets had priced in the probability of a December interest rate hike by about 67% after the announcement, according to LSEG data.
The dollar strengthened against the euro following the ECB decision.
The euro zone’s headline inflation rate reached 3.8% last month, the highest level since September 2023. As the turmoil in the Middle East continues, energy price inflation has reached 18.8%.
The outbreak of war between the US, Israel and Iran in February reignited pressure on energy prices, prompting the ECB to raise interest rates in June for the first time since 2023.
In explaining its decision on Thursday, the Governing Council said the euro zone economy continued to expand in the third quarter of this year, thanks to a recovery in services since the outbreak of the Middle East conflict.
Manufacturing, digital services and exports are being boosted by AI-related investments, while government spending on infrastructure and defense is supporting business activity. However, energy price pressures could hit consumer confidence as rising financing costs weigh on growth.
Lagarde told a news conference that the ECB would continue to monitor France’s rising borrowing costs and increasing fragmentation, which has alarmed some market participants.
Lagarde said borrowing costs at the long end of the curve have risen significantly around the world, due to inflation and interest rate expectations, as well as “bond issuance by some hyperscalers” that are increasing competition by issuing more long-term bonds.
Would you like to do another hike?
“It is becoming increasingly difficult to predict the course of ECB monetary policy,” Mark Wall, chief European economist at Deutsche Bank, said in a note Thursday.
“One question is whether the two rate hikes that have already taken place and the tightening of financial conditions since September will be enough to withstand further increases in the risk of energy inflation. Probably not.”
Wall said another key question was whether Lagarde’s impending resignation as ECB president, announced earlier on Thursday, would influence decision-making next year.
“We think institutions are bigger than people, but there is uncertainty. We expect one more rate hike to 2.75% in December while Lagarde is still governor, and that will likely be the end of the rate hike cycle.”
Dean Turner, chief eurozone economist and UK economist at UBS Global Wealth Management, said Thursday’s decision “should be seen as a hawkish pause rather than the end of the tightening cycle.”
He said in emailed comments that he does not expect France’s fiscal woes to change the direction of monetary policy “unless there is widespread fiscal stress.”
“The ECB remains focused on ensuring that today’s energy-driven inflation does not develop into a more permanent problem.”
