ECB holds deposit rate at 2.5% as energy prices raise inflation risk

The European Central Bank held its deposit facility rate at 2.5% on 29 October, leaving its principal policy setting unchanged after a 25-basis-point increase in September. The euro fell against the US dollar after the decision, according to Morningstar, as investors assessed the prospect of further monetary tightening.

The ECB holds rates at 2.5% at a time when higher energy costs have lifted risks to both inflation and economic growth. The Governing Council said energy prices posed upside risks to inflation and downside risks to growth, while underlying inflation and wages had remained broadly stable, CNBC reported.

Euro-area annual headline inflation reached 3.8% in the preceding month, its highest reading since September 2023, CNBC reported. Energy-price inflation was 18.8%, according to the same report.

What does the ECB’s 2.5% rate mean?

The 2.5% figure is the ECB’s deposit facility rate, rather than the sole interest rate set by the central bank. It is the rate at which banks can place overnight deposits with the Eurosystem, and the ECB has used it to steer its monetary-policy stance since 2024, according to the ECB.

The other two key ECB rates also remained unchanged. The interest rate on main refinancing operations, through which banks can borrow weekly from the ECB against eligible collateral, stood at 2.65%. The marginal lending facility, which provides overnight credit against collateral, was 2.90%, according to the ECB’s rate table.

The rate levels have applied since 16 September. The Central Bank of Ireland’s published ECB-rate schedule records the same three settings.

Why did the ECB leave rates unchanged?

ECB President Christine Lagarde said the Governing Council had considered raising rates but concluded that holding them was appropriate given the uncertainty, stable underlying inflation and unchanged broad wage trends, CNBC reported.

The decision did not amount to a commitment on the next policy move. Reporting on market pricing differed by timing and measure: CNBC put the probability implied by money markets of a December increase at about 67% after the announcement, while Morningstar cited derivatives markets implying an 89% probability of a quarter-point move. Those market estimates are not ECB forecasts.

For the central bank, the immediate issue is whether higher energy costs spread more widely through prices and wages. The Governing Council said the full effects of the energy shock were still unfolding, Morningstar reported, leaving subsequent decisions dependent on incoming inflation, wage and growth data.

This story draws on original reporting from CNBC.