Monetary policy statement (with Q&A)
The European Central Bank kept key interest rates unchanged amid rising energy prices and elevated uncertainty, committing to a data-dependent approach to steer inflation toward its 2 per cent target.
The European Central Bank’s Governing Council maintained its three key interest rates, citing persistent upside risks to inflation from rising energy prices and downside risks to growth. While underlying inflation remains broadly stable and wages show no significant response, the Council noted that financing conditions have tightened since its last meeting, which could further weigh on both inflation and growth. The ECB reaffirmed its commitment to ensuring inflation stabilises at its two per cent target over the medium term, adopting a meeting-by-meeting approach without pre-committing to a specific rate path.
Euro area economic activity continued to expand in the third quarter, supported by services recovery, AI-related business investment, and government spending on infrastructure and defence. However, renewed energy price increases have dampened consumer confidence, and higher financing costs are expected to constrain growth. The unemployment rate held steady at 6.4 per cent in August, with subdued employment growth and gradual productivity improvements. Over the medium term, a recovery in real incomes and confidence, alongside sustained investment, is anticipated to bolster domestic demand.
Inflation rose to 3.8 per cent in September from 3.2 per cent in August, driven by an 18.9 per cent increase in energy prices. Diesel and petrol prices reached new peaks, partly due to elevated refining margins. Services inflation increased to 3.2 per cent, while goods inflation declined to 1.1 per cent. Underlying inflation indicators remained broadly stable, with wage pressures moderating; compensation per employee grew by 3.3 per cent in the second quarter, down from 3.6 per cent in the first quarter.
The ECB highlighted that energy prices have exceeded the baseline path in its September staff projections, likely keeping headline inflation above target in the coming quarters. Risks to growth are tilted to the downside due to geopolitical tensions, potential energy supply disruptions, and tighter financing conditions. Upside risks to inflation include prolonged energy price shocks, trade tensions, and extreme weather events. The ECB stressed the need for temporary, targeted fiscal responses and structural reforms to enhance resilience and productivity.