Published:
European Central Bank keeps key interest rate on hold at 2.5%
The ECB held the deposit rate at 2.5%, saying it is well positioned to pause despite rising energy prices and higher long-term borrowing costs. Lagarde said underlying inflation and wage growth remain broadly stable and that the bank is not yet seeing additional second-round effects beyond its projections.
The European Central Bank kept its deposit facility rate at 2.5%, following a 25 basis point hike in September. In its explanation, the Governing Council argued it was well positioned to wait, even as energy prices continue to pose upside risks to the inflation outlook and downside risks to growth. President Christine Lagarde pointed to the lack of evidence for additional second-round effects beyond what is already embedded in the ECB’s September projections.
Lagarde also set out the specific developments since the last meeting: higher energy costs across oil, petrol, fuel, gas and refining margins, and a sharp rise in long-term financing costs. She cited the average 10-year sovereign yield as being up by around 35 basis points, and described a debate over whether a hike was appropriate, but concluded that a measured approach was suitable given uncertainty and broadly unchanged underlying inflation.
The release also situates the decision in the inflation and demand backdrop: euro-area headline inflation is described as having risen to 3.8% (its highest since September 2023), with energy inflation at 18.8%. The Governing Council said the euro-area economy continued to expand in the third quarter, supported by services recovery and activity linked to AI-related investment, alongside government infrastructure and defence spending, while acknowledging that energy price pressures could weigh on consumer confidence through higher financing costs.
What to watch next is how energy inflation evolves and whether wage growth and underlying inflation remain “broadly stable”, alongside any further moves in long-term sovereign yields and signs of fragmentation that could tighten financial conditions across the euro area.
Why this matters for FX
For EUR FX traders, an ECB hold is important mainly because it shapes the expected path of euro-area rates and the broader financial-conditions outlook. This decision explicitly weighs upside energy-driven inflation risks against growth and says underlying inflation and wages are broadly stable, which can influence how markets price near-term tightening versus a slower-than-expected path of cuts. The ECB also flagged uncertainty around long-end funding conditions, which links directly to sovereign market fragmentation and euro-area credit conditions.