ECB Holds Interest Rates at 2.5% as Euro Zone Inflation Hits 3.8%

The European Central Bank kept its key deposit rate at 2.5% on Thursday, October 29, 2026, as rising energy costs pushed euro zone inflation to 3.8%. The Governing Council maintained its wait-and-see approach after September's rate increase, citing uncertainty over inflation and economic growth despite mounting pressure on borrowing costs.

The decision followed a 25-basis-point increase in September. According to the ECB, higher energy prices pose an upside risk to inflation while potentially weakening economic growth, although underlying inflation and wage growth have remained broadly stable.

Euro zone inflation reached 3.8% in September, its highest level since September 2023, while energy price inflation climbed to 18.8% amid continued turmoil in the Middle East. According to LSEG data, financial markets priced in a 67% probability of another rate increase in December following the announcement.

ECB President Christine Lagarde said the central bank had not observed additional inflationary effects beyond those already incorporated into its September projections. She identified rising costs across oil, gasoline, fuel, natural gas and refining margins as major developments since the previous policy meeting.

Lagarde also highlighted a sharp increase in long-term financing costs, with average 10-year sovereign bond yields rising by approximately 35 basis points. She said the Governing Council unanimously concluded that holding rates was appropriate given the uncertainty and broadly unchanged underlying inflation.

"At this point in time we are not seeing second round effects in addition to what is already included in the projections" released in September, ECB President Christine Lagarde told CNBC's Annette Weisbach during a press conference.

The ECB said the euro zone economy continued expanding in the third quarter, supported by a recovery in services since the Middle East conflict began. Investment related to artificial intelligence is also supporting manufacturing, digital services and exports, while government spending on infrastructure and defense is sustaining business activity.

However, the central bank warned that higher energy prices could weaken consumer confidence as increased financing costs weigh on economic growth. Lagarde also said the ECB would continue monitoring rising French borrowing costs and growing fragmentation in financial markets.

She attributed the broader increase in long-term borrowing costs partly to inflation and interest rate expectations, as well as increased bond issuance by large technology companies. She noted that these companies were issuing more long-term debt, intensifying competition for financing.

Deutsche Bank's chief European economist, Mark Wall, said the outlook for ECB monetary policy had become more difficult to predict. He questioned whether previous rate increases and tighter financial conditions would be sufficient to contain the risk of further energy-driven inflation.

"Predicting the path of ECB monetary policy is becoming more challenging," Deutsche Bank's chief European economist, Mark Wall, said in a note on Thursday.

Wall said the two rate increases already delivered and the tightening of financial conditions since September might not be enough to counter the additional inflation risk posed by energy prices. He also raised questions about how Lagarde's announced departure as ECB president could affect policy decisions next year.

Wall said Deutsche Bank expected another increase before the end of the year, taking the deposit rate to 2.75% in December while Lagarde remained president. He added that this would probably mark the end of the rate-hiking cycle.

"One question is whether the two hikes already delivered and the tightening of financial conditions since September are enough to lean against the further increase in energy inflation risk? Probably not." Wall said.

Dean Turner, chief euro zone and U.K. economist at UBS Global Wealth Management, also viewed the ECB's decision as a pause rather than the end of monetary tightening. He said France's fiscal challenges were unlikely to change the policy direction unless broader financial stress emerged.

"The ECB's focus remains firmly on ensuring that today's energy-driven inflation does not develop into a more persistent problem." Turner said.