ECB Holds Deposit Rate at 2.5%, Leaves Door Open to Further Hikes

The European Central Bank (ECB) followed the U.S. Federal Reserve (Fed) in holding interest rates steady. However, it left the door open to further rate hikes as energy prices rose due to the war in the Middle East, sustaining inflationary pressures.

EPA Yonhap News

On October 29 local time, the ECB said it had held a monetary policy meeting in Frankfurt, Germany, and kept its deposit rate at 2.50% per year. It also maintained its main refinancing rate and marginal lending rate at 2.65% and 2.90% per year, respectively.

In a statement, the ECB said, "The effects of the energy shock continue to be felt, but underlying inflationary pressures remain broadly stable," adding that "wages have also shown no clear response at this stage."

However, it warned that if the impact of rising energy prices persists, inflation could rise and economic growth could slow. The ECB said, "Given the scale and duration of the energy shock, as well as its indirect and second-round effects, inflation could rise and growth could slow."

After energy prices surged following the outbreak of the war in Iran in late February, the ECB raised its policy rates twice, by 0.25 percentage points each time, in June and September. Last month, the eurozone's consumer price inflation rate reached 3.8% year over year, its highest level in three years since September 2023. That is nearly twice the ECB's 2% inflation target.

At a press conference that day, ECB President Christine Lagarde said energy prices were higher than previously projected and that inflation could remain significantly above target over the next few quarters. However, she said there was still no clear evidence of second-round effects, in which rising prices spread to wages and the prices of other goods and services.

As a result, some expect the ECB could raise rates again as early as December. The ECB has said it will not follow a predetermined path for future monetary policy, but will make decisions at each meeting based on economic data and the inflation outlook.

The ECB also raised the possibility of intervening in France's financial markets, where government bond yields have surged amid a fiscal crisis. President Lagarde said the ECB could use its available tools if excessive and disorderly market movements threatened the transmission of monetary policy, while emphasizing that certain conditions must be met for an intervention.

The ECB has a Transmission Protection Instrument (TPI), which allows it to purchase member states' government bonds to ease financial market tensions. However, observers say it may be difficult to apply the instrument to France, as its budget deficit and national debt are far above the European Union's (EU) fiscal rules.

This content was produced with the assistance of AI translation services.