ECB Holds Rates Steady as Expected, Warns Energy Shock to Push Up Inflation and Weigh on Growth

The European Central Bank announced on Thursday that it kept the deposit facility rate, main refinancing rate and marginal lending rate unchanged at 2.50%, 2.65% and 2.90%, respectively, in line with market expectations. In its statement, the ECB said continued rises in energy prices pose upside risks to the inflation outlook and downside risks to the growth outlook. The ECB said that while the full impact of the energy shock is still unfolding, underlying inflation has so far remained broadly stable and wages have not yet shown a material response. However, an increase in the scale and duration of the energy shock, as well as its impact on indirect and second-round effects, could push inflation higher and weigh on growth. Since the last meeting, financing conditions have tightened somewhat and are expected to weigh on inflation and growth. The ECB reiterated that it will ensure inflation stabilizes at its 2% target over the medium term. The Governing Council said it remains able to navigate the current highly uncertain environment and will continue to determine the appropriate monetary policy stance in a data-dependent, meeting-by-meeting approach. Specifically, rate decisions will be based on an assessment of the inflation outlook and related risks, combined with the latest economic and financial data, underlying inflation dynamics and the strength of monetary policy transmission. The Governing Council stressed that it does not pre-commit to a particular rate path. On asset purchases, the ECB said that as Eurosystem central banks no longer reinvest the principal from maturing securities, the Asset Purchase Programme (APP) and Pandemic Emergency Purchase Programme (PEPP) portfolios are declining at a measured and predictable pace. The ECB also said it stands ready to adjust all of its instruments within its mandate to ensure that inflation stabilizes at its 2% target over the medium term and to preserve the smooth transmission of monetary policy. In addition, if unwarranted, disorderly market dynamics occur and such dynamics seriously threaten the transmission of monetary policy across euro area countries, the Transmission Protection Instrument (TPI) can be used to address them, thereby helping the Governing Council fulfill its price stability mandate more effectively. ECB President Lagarde will hold a press conference at 21:45 Beijing time to comment on the considerations behind the decisions. Just a few hours earlier, Lagarde announced that she will step down in February 2027. Her term was originally set to end in October 2027. Traders slightly reduced their bets on further ECB rate hikes, expecting a cumulative 70 basis points of tightening by the end of 2027, down from the previous expectation of 72 basis points. The euro extended its decline, falling to $1.1111, a 17-month low.