ECB Holds Key Rates Steady as Lagarde Signals Continued Vigilance on Inflation

The European Central Bank announced on Thursday that it kept its key interest rates unchanged at the October policy meeting. The main refinancing rate, the marginal lending facility rate and the deposit facility rate remained at 2.65%, 2.90% and 2.50% respectively, matching market expectations.

In the accompanying press conference, President Christine Lagarde said that recent data indicate the Eurozone economy is still expanding in the third quarter, but that growth is vulnerable to downside risks. She noted that “energy prices have increased beyond baseline and will raise inflation further in the medium term,” while underlying inflation has stayed broadly stable.

Lagarde added that the Governing Council debated a possible rate hike but, given the uncertainty surrounding inflation dynamics and the lack of a clear upward shift in underlying price pressures, decided unanimously to hold rates. She emphasized that the ECB will continue a data-dependent, meeting-by-meeting approach and is not pre-committing to any specific rate path.

The policy statement highlighted that longer-term inflation expectations are anchored around 2%, but headline inflation is expected to stay above the target for the coming quarters before easing as energy-price pressures recede. Fiscal sustainability was described as “the key anchor” for the euro area’s economic outlook.

Market reaction was modestly bearish, with the euro losing about 0.4% against the dollar after the announcement, trading around 1.1110. Analysts noted that the euro’s recent decline has been driven by high oil prices and concerns about France’s fiscal situation, but a hawkish tone from the ECB could provide some support.

“The ECB remains well positioned to navigate current elevated uncertainty and will adjust all of its instruments within its mandate to ensure inflation stabilises at its 2% target in the medium term,” Lagarde said.

The ECB also confirmed that the Pandemic Emergency Purchase Programme (PEPP) is being wound down in a measured manner, with no reinvestments of principal payments from maturing securities. The bank signalled readiness to use its full toolkit if needed to preserve smooth monetary-policy transmission.

Analysts highlighted that credit standards have tightened and loan demand weakened in the third quarter, creating a headwind for growth. While futures markets price a high probability of a rate hike in December, the ECB’s current pause reflects a balance between inflation concerns and fragile economic activity.