ECB holds rates, signals possible Dec hike

The European Central Bank kept its three key interest rates unchanged at its October 29, 2026 meeting, maintaining the deposit facility at 2.5%, the main refinancing operations rate at 2.65% and the marginal lending facility at 2.9%. The decision matched prior signalling and came as inflation in the euro area stood at 3.8%, around twice the ECB’s 2% target.

In its statement, the ECB said that financing conditions have tightened since the Governing Council’s previous meeting and that this is likely to weigh on both inflation and economic growth. Despite holding rates steady, the central bank emphasized its commitment to adjust monetary policy as needed to ensure inflation stabilizes at the 2% target over the medium term.

Policymakers highlighted that energy prices have continued to rise, posing upside risks to the inflation outlook and downside risks to the growth outlook. The ECB noted that high and rising energy costs are fuelling inflation risks even as underlying inflation and wages have remained broadly stable so far.

Price growth being roughly double the target has reinforced concerns that the energy shock could become more persistent. At the same time, the ECB wants to avoid triggering financial instability or a recession through excessive tightening, underscoring the need to balance inflation control with market stability.

The ECB indicated that a further interest rate increase in December remains an option. It stressed that data and developments in the period leading up to the final meeting of the year will be central in determining whether an additional hike is warranted.

Officials described the coming weeks as information-rich, suggesting that incoming indicators on prices, wages, growth and financial conditions will shape the next policy move. Many economists expect only a limited number of additional increases before the current tightening cycle concludes.

The ECB underlined that financing conditions have tightened, with higher borrowing costs expected to curb credit flows and slow economic activity. It reiterated that it stands ready to use all instruments within its mandate to maintain price stability and safeguard the transmission of monetary policy.

Portfolios under the Asset Purchase Programme and the Pandemic Emergency Purchase Programme continue to decline at a gradual and predictable pace, as the ECB is no longer reinvesting principal payments from maturing securities. The central bank also restated that the Transmission Protection Instrument is available to counter unwarranted and disorderly market dynamics that could threaten policy transmission.

The October 29 meeting was overshadowed by the announcement that ECB President Christine Lagarde will leave her post in February, earlier than the scheduled end of her term. Her resignation comes as the ECB navigates elevated inflation, tighter financing conditions and market tensions in parts of the euro area bond market.

While the Governing Council’s policy framework and inflation target remain unchanged, the forthcoming leadership transition adds an additional layer of uncertainty to the longer-term policy outlook at a time when the ECB is still managing the end phase of its tightening cycle and the ongoing reduction of its balance sheet.