European Central Bank President Christine Lagarde announced on the evening of October 29 Beijing time that the central bank would keep its three key interest rates unchanged, as energy price increases pushed euro area inflation to 3.8% in September, with risks of rising inflation and slowing growth coexisting.
The ECB will remain data-dependent, assess conditions meeting by meeting, and avoid pre-committing to a rate path, with the goal of anchoring inflation at 2% over the medium term.
Below is an edited transcript of the opening remarks by ECB President Christine Lagarde at Thursday's press conference:
Opening remarks
Good afternoon, and welcome to this press conference, where the Vice-President and I are glad to have you with us. The Governing Council decided today to keep the three key ECB policy rates unchanged. With energy prices continuing to rise, the inflation outlook faces upside risks while the growth outlook faces downside risks.
The full effects of the energy shock are still unfolding, but core inflation has so far remained broadly stable and wages have yet to show a substantial pass-through increase. A larger and more prolonged energy shock, along with its indirect and second-round effects, is likely to push inflation higher and weigh on economic growth. Since our last meeting, financing conditions have tightened further, which may dampen both inflation and economic growth.
We will set an appropriate monetary policy to ensure inflation stabilizes at our 2% target over the medium term. We are well equipped to handle the current high level of uncertainty. In determining the appropriate monetary policy stance, we will follow the principle of data dependence and meeting-by-meeting assessment.
Specifically, rate decisions will be based on our assessment of the inflation outlook and its risks, in light of the latest economic and financial data, the path of core inflation, and the strength of monetary policy transmission. We will not pre-commit to a particular rate path. The details of today's decision have been published in a press release on our website.
I will now describe in more detail how we see the economy and inflation evolving, and then review financial and monetary conditions.
Economic activity
The latest data show that the euro area economy continued to expand in the third quarter. Services, which had weakened early in the Middle East conflict, have recovered; manufacturing, digital services, and exports have benefited from AI-related business investment; and government infrastructure and defense spending have also supported the economy. These factors are expected to continue underpinning growth in the near term.
At the same time, renewed energy price increases are weighing on consumer confidence, and higher financing costs may restrain growth. The unemployment rate stood at 6.4% in August. Employment and labor force growth remain weak, while productivity is gradually recovering.
Over the medium term, as energy prices gradually decline, the labor market remains solid, and household confidence and real incomes recover, domestic demand is expected to pick up. AI-related investment and government infrastructure and defense spending will also continue to support growth; a recovery in external demand will boost exports.
Raising potential growth depends on structural reforms and a foundation of sound public finances. Fiscal sustainability is an important cornerstone of macroeconomic stability. Fiscal measures in response to the energy shock should be temporary, targeted, and tailored. Simplifying and unifying the EU single market rules, accelerating the energy transition, and completing the savings and investment union are key to strengthening economic dynamism and resilience.
Negotiations on the legal framework for the digital euro are entering the final stage, and we reiterate that an agreement on the Single Currency Package should be reached as soon as possible.
Inflation
Inflation rose to 3.8% in September from 3.2% in August. Energy inflation rose significantly, from 14.3% to 18.9%; diesel and gasoline prices hit new highs in September, partly due to higher refining margins. Core inflation, excluding energy, rose from 2.1% to 2.3%; food inflation rose from 1.1% to 1.3%; services inflation rose from 3.0% to 3.2%, while goods inflation fell from 1.2% to 1.1%. Core inflation indicators were broadly stable overall, but price pressures are already appearing at the front end of the pricing chain.
Wage pressures remain moderate. Compensation per employee grew 3.3% year-on-year in the second quarter, down from 3.6% in the first quarter; higher productivity helped contain the rise in unit labor costs. Our forward-looking wage tracker suggests that negotiated wage growth will fluctuate in the 2.5%–2.8% range for the remainder of 2026, averaging 2.6% over the first three quarters of 2027.
Short-term inflation expectations have risen somewhat, but most longer-term inflation expectations remain around 2%, supporting convergence of inflation toward the target over the medium term.
Energy prices are already above the ECB staff baseline projection path from September and may push inflation higher in the near term, with headline inflation set to remain clearly above target for the next few quarters. After that, lower energy inflation combined with the lagged effects of higher rates will help bring inflation back to target.
Risk assessment
The growth outlook is tilted to the downside: mainly due to the Middle East conflict and the evolution of the Russia-Ukraine situation. Continued disruptions to energy supply could lead to larger and longer-lasting energy price increases, squeezing household real incomes, consumption, and investment. A deterioration in global financial market sentiment and intensified spillovers from bond market risks would further tighten financing conditions and weigh on demand. Fiscal uncertainty also raises financing costs, hits confidence, and drags on consumption and investment. Renewed trade frictions among major economies would disrupt supply chains and dampen exports and domestic demand.
Upside scenario: If the economy and energy markets adapt to conflict disruptions faster than expected, or if geopolitical conflicts are resolved sustainably, growth could be stronger than expected. In addition, euro area firms deploying new technologies, fiscal spending on infrastructure and defense, and reforms to raise productivity and improve the single market could also bring stronger-than-expected growth.
The inflation outlook is tilted to the upside: also mainly driven by the Middle East conflict and the Russia-Ukraine situation. The energy shock could escalate further, with second-round pass-through to prices and wages exceeding expectations. If gas supply is interrupted and low inventories coincide with a cold winter, natural gas prices could surge. The longer energy prices stay high, the more likely indirect and second-round effects will push up broad inflation. Intensified trade frictions would fragment global supply chains and restrict the supply of key raw materials, aggravating capacity constraints in the euro area. A stronger El Niño, extreme weather, and broad climate and ecological crises could also push up food prices.
Downside scenario: If geopolitical conflicts are resolved sustainably, or if indirect and second-round effects from energy price increases are weaker than expected, inflation would be lower than expected; rising risk aversion in financial markets and higher long-term rates would weigh on demand and also push inflation down.
Financial and monetary conditions
Since our last meeting, financial conditions have tightened, with rates generally higher and equity indices lower. The cost of market-based debt financing for firms rose to 4.1% in August from 4.0% in July; bank lending rates to firms remained unchanged at 3.8%. The annual growth rate of bank loans to firms slowed to 4.2% in August and September (from 4.4% in July); the annual growth rate of corporate bond issuance was 4.2% in September, above 3.8% in August and 3.5% in July.
The latest bank lending survey shows that credit standards for firms tightened in the third quarter, with banks concerned about the economic risks their customers face. Although firms' demand for inventory and working capital financing rose, demand for firm loans weakened due to high rates. Mortgage rates rose from 3.5% in August to 3.6%, and mortgage loan growth edged down to 3.0% in September. Mortgage credit standards were unchanged in the third quarter, but high rates sharply reduced mortgage demand.
Conclusion
The Governing Council decided today to keep the three key ECB interest rates unchanged. We will implement monetary policy to ensure inflation stabilizes at our 2% target over the medium term. We determine our monetary policy stance in a data-dependent and meeting-by-meeting manner; rate decisions are made based on the latest economic and financial data, core inflation dynamics, and the efficiency of monetary policy transmission, after assessing the inflation outlook and its risks. We will not pre-commit to a rate path.
In any case, we will adjust all our policy tools as needed within our mandate to ensure that inflation stabilizes sustainably at our medium-term target and to safeguard the smooth transmission of monetary policy. I now look forward to your questions.
Comments