ECB holds rates at 2.5%, warns of rising inflation risks

The European Central Bank kept its deposit rate at 2.5% on Thursday, October 29. It warned that energy prices "have continued to rise, posing upside risks to the inflation outlook and downside risks to the growth outlook," according to the ECB's policy statement. The main refinancing and marginal lending rates also stayed at 2.65% and 2.90%.ecb.europa.eu

Markets had expected the pause. What matters now is how policymakers weigh rising energy costs against tighter borrowing conditions, especially in France. The decision came only hours after President Christine Lagarde said she will step down on February 7, 2027, about nine months before her term ends, Euronews reported.euronews.com

Inflation pressure builds

The ECB has raised rates twice this year, most recently in September, to stop an energy price jump tied to the Iran war from taking hold, according to Reuters reporting republished by Global Banking & Finance Review. Euro zone inflation rose to 3.8% in September from 3.2% in August, almost double the 2% target.globalbankingandfinance.com+1

The bank said underlying inflation has "remained broadly stable so far" and wages "do not show a material response at this stage." Even so, it warned that the larger and longer energy shock is "likely to drive up inflation and lower growth." It repeated that it is "not pre-committing to a particular rate path".ecb.europa.eu

Traders still expect another increase. Before the decision, markets priced about a 65% chance of a December hike, according to investingLive. A Reuters poll found 64 of 73 economists expect a quarter-point move that month.admiralmarkets.com+1

France complicates the path

The ECB acknowledged that financing conditions "have tightened since the Governing Council's last meeting." Reuters noted that France now pays a 155 basis-point premium over Germany to borrow for 10 years, the highest in decades. Last week, France's 10-year borrowing costs rose above 5% for the first time since 2002. Moody's ↗ 1.04% kept the country's Aa3 rating but with a negative outlook.euronews.com+1

ING ↘ 2.42% estimated that the rise in yields since September has had the effect of a 25 basis-point hike in Germany and closer to 50 basis points in France. "The bond market has taken over the ECB's job," the bank said. RBC Royal Bank of Canada ↘ 1.48% strategist George Moran said wider sovereign spreads "give the ECB cover to avoid further aggressive tightening".macon.com+1

The ECB said again that its never-used Transmission Protection Instrument is available to counter "unwarranted, disorderly market dynamics".ecb.europa.eu

Markets and leadership

The decision barely moved markets. The euro hovered near its lows for the year against the dollar, EUR/USD, ahead of the announcement. Lagarde's press conference was set to follow. She was expected to face questions about France and her early exit, which starts a race to succeed her. Spain's Pablo Hernández de Cos and the Netherlands' Klaas Knot are seen as frontrunners.investinglive.com+1