News & analysis
ECB Holds Rates at 2.50% but Keeps Another Hike on the Table
A unanimous hold masked a debate over raising rates, and Lagarde's remark that conditions "could have warranted" tightening points to more to come.
Key points
- The ECB held its deposit rate at 2.50% and kept its guidance unchanged, but the hold was unanimous only after policymakers debated a hike.
- Lagarde said conditions "could have warranted" further tightening and that the ECB's "direction of travel" is clear, without committing to December.
- MUFG expects a further 50 basis points of tightening, in 25-point steps at the December and March projection meetings.
The European Central Bank left its deposit rate at 2.50% as expected, but Lagarde said the unanimous decision followed debate over whether to raise borrowing costs, and that current conditions "could have warranted" tighter policy. Her comments in the post-decision press conference stopped short of pre-committing to December while describing the central bank's "direction of travel" as clear.
The rate statement set out both sides of the argument explicitly. It emphasised an energy shock that has been larger and longer-lasting than anticipated, while adding a new reference to the impact of tighter financial conditions and to the absence of second-round effects. MUFG characterised the combination as a cautious tone that reads as justification for a pause at this point rather than an argument against tightening later.
Lagarde's question-and-answer session sharpened that impression. She disclosed that the decision to hold was unanimous but that policymakers had debated whether to hike at the meeting, and suggested current conditions "could have warranted" further tightening. The ECB noted market conditions but gave little indication that higher market interest rates are viewed as a substitute for policy action — a distinction that matters for anyone pricing government bonds on the view that market-driven borrowing costs can do the central bank's work.
MUFG's call remains for a further 50 basis points of tightening — half a percentage point, or 50 hundredths of a percentage point off a base of 100 — delivered in 25-basis-point steps at the December and March projection meetings. That would push the deposit rate into mildly restrictive territory, meaning a level designed to restrain demand rather than simply stop stimulating it.
The mechanism the ECB is weighing is second-round effects: the process by which a one-off jump in energy costs feeds into wage settlements and service prices, making inflation stickier and harder to reverse. The ECB continues to see relatively little evidence that energy prices are generating those effects. The risk is duration — the longer the energy shock runs, the more room prices have to broaden, which is why MUFG argues the case for further action will eventually win out with some support from incoming data.
Taken together, the decision and Lagarde's remarks point to a pause with a tightening bias rather than a peak in rates. That reading strengthens if upcoming data show price pressures spreading beyond energy into wages and services; it weakens if the pass-through stays contained or if tighter financial conditions and the energy shock weigh more heavily on activity than policymakers currently assume.
