ECB Lagarde Vows to Tame Inflation Amid Energy Shock

The European Central Bank (ECB) left interest rates unchanged at its October 2026 meeting, as expected, keeping the main refinancing rate at 2.65% and the deposit facility rate at 2.50%. Policymakers adopted a wait-and-see approach amid rising inflation risks and slowing economic growth. The ECB warned that elevated energy prices could fuel inflation while weighing on economic activity, particularly if indirect and second-round effects intensify. However, underlying inflation remains broadly stable, with no significant wage response so far. While policymakers offered no clear guidance on the future rate path, the ECB noted that higher borrowing costs across Europe could further dampen growth and inflation. The announcement came hours after ECB President Christine Lagarde reportedly announced plans to step down early, potentially triggering a major leadership transition amid heightened volatility in French bond markets and persistently high energy prices.

The European Central Bank is widely expected to keep interest rates unchanged on Thursday, maintaining its main refinancing rate at 2.65% and the deposit facility rate at 2.5%, as policymakers adopt a wait-and-see approach amid rising inflation and the effects of previous tightening. The decision comes amid France’s fiscal and political turmoil, which has fueled volatility across European bond markets. Rising bond yields increase borrowing costs, potentially weighing on economic activity and easing inflationary pressures, which could reduce the need for further ECB tightening. With an October rate hold largely priced in, investors will focus on President Christine Lagarde’s press conference for clues about the policy outlook. Markets continue to anticipate a rate hike by December, with two increases fully priced in by April 2027.

ECB policymakers saw inflation risks skewed to the upside when they delivered their first rate hike since 2023 at the September meeting, but stressed the importance of not signaling any further policy moves and keeping all options open, according to the meeting accounts released Thursday. Officials warned that eurozone inflation could come in higher than projected, but stressed the importance of avoiding guidance on the future interest-rate path given the high uncertainty surrounding the inflation outlook and range of possible scenarios due to the ongoing fighting between the US and Iran, as well as Russia’s war in Ukraine. The ECB also noted that while the policy response should remain proportionate, the 2.50% deposit rate remained within staff estimates of the neutral range.