ECB Keeps Rate Path Open Amid Inflation Uncertainty: Minutes

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.

The European Central Bank raised its key interest rates by 25 bps at its September meeting, marking its second hike since the US-Iran war began. The ECB said the conflict in the Middle East continues to fuel inflationary pressures, with inflation expected to remain well above its 2% target for an extended period. The main refinancing rate was raised to 2.65%, while the deposit rate increased to 2.5%. Meanwhile, the ECB kept its 2026 inflation forecast at 3.0% but revised its projections higher for 2027 and 2028, to 2.5% and 2.1%, respectively. Growth forecasts were upgraded to 0.9% for 2026 and 1.4% for 2027, reflecting greater-than-expected resilience in the euro area economy, while the 2028 forecast remained unchanged at 1.5%. At a press conference following the meeting, ECB President Christine Lagarde said risks to growth are tilted to the downside, while inflation risks are currently tilted to the upside, reiterating that future decisions will be made on a meeting-by-meeting basis.

The European Central Bank is expected to raise its key interest rates by 25 basis points on Thursday, marking the second hike since the US-Iran war began, while signaling caution over further increases that could weigh on economic activity. The main refinancing rate is expected to rise to 2.65%, and the deposit rate to 2.5%. Eurozone inflation accelerated to 3.3% in August, its highest level in three years and well above the ECB’s 2% target. However, there have been few signs of the second-round inflation effects policymakers typically fear when energy prices surge, as they have since the war closed the Strait of Hormuz. Economists remain unconvinced that further tightening will be necessary, warning that additional hikes could risk recession. Interest-rate futures, however, are pricing in a third hike by December, while policymakers continue to flag upside risks to inflation and the recent rise in bond yields adds further uncertainty to the policy outlook.