ECB holds rates and says December data will decide hike

ECB holds rate and points to December

Lagarde, speaking at a financial literacy conference in Milan organised by Italy's Osservatorio, said the run of indicators before the next Governing Council meeting would settle the question. "We will have many indicators between now and December that will really help us determine whether a hike is necessary," she said.

The ECB left its deposit rate at 2.5%, its main refinancing rate at 2.65% and its marginal lending rate at 2.9%. Lagarde said the Governing Council discussed raising rates at its October meeting but decided unanimously to hold while awaiting further evidence. The ECB has raised rates twice this year to stop an Iran war-induced energy price jump from becoming entrenched, and it has signalled more may be needed, though it was not in a hurry without evidence of dangerous second-round inflation effects.

The rate decision was published only hours after Lagarde announced she would step down early. She has said she will step down on Feb 7, 2027, months ahead of the formal end of her mandate. A long list of policymakers, including the influential heads of the German and Italian central banks, have signalled another move in December may be likely.

Inflation and energy

RTE reported that euro zone inflation rose to a three-year high of 4% in October, driven by food and energy costs, and analysts expect it to climb further in the coming months. Lagarde said the numbers were "predominantly energy" and that energy costs were "bringing growth down and prices up." The ECB said energy prices had continued to rise, posing upside risks to the inflation outlook and downside risks to growth.

Lagarde said the central bank was watching closely for second-round effects from the energy shock set off by the Iran war. The conflict has lifted prices for diesel used in cars and jet fuel for aircraft, with knock-on effects beyond direct fuel bills. She said underlying inflation had remained broadly stable and wages had not shown "a material response" to higher prices, but that "the increased magnitude and duration of the energy shock" were likely to drive up inflation and undermine growth.

Growth, AI and bond markets

The ECB's statement said financing conditions had tightened since the Governing Council's last meeting, which was likely to weigh on inflation and growth. Lagarde said it was very difficult to disentangle supply-driven from demand-driven shocks. AI investment is fuelling demand and making the euro zone economy more resilient at the same time. "The current situation is made hard by the energy shock and AI pulling in opposite directions," she said.

She said the ECB must not apply the rate tool "like a hammer", but equally could not let inflation expectations run away. Reuters reported that France was paying a decades-high 155 basis point premium over Germany to borrow for 10 years. Lagarde said bond yields were likely to stay high for heavily indebted euro zone members, which the ECB needed to take into account.

She said the ECB had instruments to respond if market developments threatened the smooth transmission of monetary policy, including through "unwarranted and disorderly market movements." Economists have warned that the rise in borrowing costs is likely to curb the flow of credit and slow the economy.

What happens next

ECB staff will publish fresh economic projections next month, before the central bank's final meeting of the year in December. Lagarde described the six weeks before the meeting as "information-rich" and said the data would help determine whether the situation that could have warranted a hike is confirmed. "In that case the sense of direction is quite clear," she said.

The vast majority of economists polled by Reuters see just one or two more hikes before the current tightening cycle ends. Lagarde said: "What is driving us is the price stability mandate that we have."