ECB holds interest rates steady at 2.5% as energy shock threatens inflation and growth

The European Central Bank (ECB) kept its three key interest rates unchanged on Thursday (October 29), as rising energy prices heightened inflation risks and clouded the euro area’s growth outlook.

Following its latest monetary policy meeting, the ECB’s Governing Council held the deposit facility rate at 2.50 per cent, the main refinancing operations rate at 2.65 per cent and the marginal lending facility rate at 2.90 per cent.

The central bank said the energy shock was still unfolding, with its full economic implications yet to emerge. While underlying inflation had remained broadly stable and wage growth had not shown a material response so far, the increasing scale and duration of the energy shock could push inflation higher and weaken economic activity.

The ECB also flagged the risk of indirect and second-round effects, through which higher energy costs could feed into broader prices and wages.

ECB flags inflation risks, weaker growth outlook

The Governing Council said the combination of rising energy prices and tighter financing conditions could complicate the euro area’s economic outlook.

Financing conditions have tightened since the ECB’s previous meeting, a development the central bank expects to weigh on both inflation and growth.

The ECB said it remained committed to ensuring that inflation stabilises at its 2 per cent target over the medium term.

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However, it stopped short of signalling a predetermined path for interest rates, emphasising that future decisions would depend on incoming economic and financial data.

The Governing Council said it would assess the inflation outlook, underlying price pressures and the strength of monetary policy transmission before deciding on the appropriate policy stance.

It reiterated that monetary policy would follow a data-dependent, meeting-by-meeting approach and that it was not pre-committing to a particular rate trajectory.

ECB keeps balance sheet reduction on track

The central bank also confirmed that its asset purchase programme (APP) and pandemic emergency purchase programme (PEPP) portfolios would continue to decline at a measured and predictable pace.

The Eurosystem is no longer reinvesting principal payments from maturing securities under the two programmes, allowing the portfolios to shrink gradually.

The ECB said it remained ready to adjust all instruments within its mandate to bring inflation back to its 2 per cent medium-term target and preserve the smooth transmission of monetary policy across the euro area.

It also highlighted the availability of its Transmission Protection Instrument (TPI), which can be deployed to counter unwarranted and disorderly market movements that pose a serious threat to the transmission of monetary policy across euro area countries.

ECB President Christine Lagarde was scheduled to address the considerations behind the Governing Council’s decision at a press conference beginning at 2:45 pm Central European Time on Thursday.

The latest decision comes as policymakers weigh the competing risks of persistent energy-driven inflation and weaker economic growth, leaving the future course of monetary policy dependent on how the shock evolves and feeds through the economy.