ECB holds key rate at 2.5%, warns of inflation risk from high oil prices

Eurozone prices hit a three-year high, but the European Central Bank (ECB) decided against raising its key interest rate. At its monetary policy meeting on October 29 (local time), the ECB kept its deposit rate, its main policy rate, unchanged at an annual 2.50%. This followed a 0.25 percentage point hike in September, with the bank holding off on a further increase this time. The ECB had raised rates twice this year after energy prices surged due to the war with Iran.

Eurozone consumer prices across the 21 member countries rose 3.8% year-on-year in September, the highest level since September 2023—a three-year peak. Energy prices soared 18.8%. In its statement, the ECB said that "continuing rises in energy prices pose upside risks to the inflation outlook and downside risks to the growth outlook." It added that "underlying inflation remains broadly stable, and wages are not responding significantly to price increases."

Amid heightened bond market volatility triggered by France's fiscal instability, French 10-year government bond yields traded at intraday levels about 155 basis points (1bp = 0.01 percentage point) above German Bunds. France's government bond funding costs have climbed to their highest level in roughly 25 years. When market rates spike, financial conditions tighten even without an ECB rate hike.

The monetary policy decision came just hours after ECB President Christine Lagarde announced in a statement on October 29 that she would step down from her post on February 7 next year. Her term had originally run through October 2027.