European Central Bank Expected to Hold Interest Rates at 2.5%

by · Greek City Times

The European Central Bank (ECB) is expected to keep its key deposit rate unchanged at 2.5% at its meeting on Thursday, 29 October 2026, as conflicting economic forces complicate the outlook for inflation and monetary policy across the eurozone.

The ECB raised interest rates twice in 2026, by 25 basis points in June and another 25 basis points in September, in response to soaring energy prices triggered by the war in the Middle East and inflation exceeding its 2% target.

The latest energy shock pushed eurozone inflation to 3.8% in September, up from 2.1% in February, when the United States and Israel began attacks on Iran.

Energy prices drive inflation higher

So far, higher energy costs have passed through to the prices of other goods and services to a limited extent.

Read more: European Central Bank to Raise Rates Amid Energy Shock

Energy prices rose by 18.9% year on year in September, compared with a 3.1% decline in February. Service prices increased by 3.5%, up from 3.3% over the same period.

Core inflation, which excludes energy and food prices, edged up to 2.5% from 2.4%.

However, economists expect core inflation to rise further as businesses gradually lose their ability to absorb higher energy costs without passing them on to consumers.

Eurozone economy faces weaker demand

The eurozone economy is in a different position from 2021–2022, when pandemic-related supply chain disruptions and the energy shock following Russia’s invasion of Ukraine coincided with expanding corporate profit margins.

Households also held substantial savings accumulated during the pandemic, while government support measures boosted available income. These factors helped drive inflation into double digits.

Today, economic demand is considerably weaker, limiting upward pressure on prices.

The eurozone economy continues to grow, but at a much slower pace of around 1.2% in the second quarter of 2026. Business investment in artificial intelligence and exports of AI-related products account for a significant share of that growth.

Europe’s green transition also supports economic resilience by reducing the impact of high natural gas prices on electricity costs.

As a result, the latest inflationary wave is expected to prove considerably milder than the surge in 2021–2022. ECB Chief Economist Philip Lane has indicated that the central bank’s monetary policy response is also likely to be less aggressive.

Markets anticipate further rate increases

Money markets do not expect the ECB to change interest rates on Thursday, but they anticipate two to three additional increases over the next 12 months. The International Monetary Fund (IMF) expects at least one more increase before the end of 2026.

However, the global bond sell-off has pushed yields significantly higher, including across Europe. Higher borrowing costs could weaken demand and reduce the need for further ECB rate increases.

Analysts surveyed by Bloomberg expect the ECB to make one final increase, taking the deposit rate to 2.75% in December.

Rising bond yields increase borrowing costs for large companies, discouraging them from using capital markets to finance investment projects. They also raise governments’ borrowing costs.

ECB officials warn higher bond yields could slow growth

In a speech in early October, Lane said September’s inflation figures did not indicate a broad-based and lasting increase in core inflation.

He also warned that rising long-term bond yields would slow economic growth and limit the pass-through of higher energy costs more than the ECB had anticipated in September.

ECB President Christine Lagarde delivered a similar message to the European Parliament late last month.

“Although growth is resilient, long-term interest rates have increased significantly since our last meeting, which will slow growth and limit pass-through (of energy costs) more than anticipated in our September projections,” she said.

The ECB therefore faces a delicate balancing act: containing renewed inflationary pressures without further weakening an already subdued eurozone economy.

(Source: AMNA)

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