ECB keeps interest rates on hold despite eurozone inflation fears

Key deposit rate kept at 2% even as recovery starts to drive up price growth across bloc

The European Central Bank kept interest rates on hold on Thursday for the third meeting in a row despite concerns that a modest economic recovery across the eurozone would fuel inflation.

The ECB kept its key deposit rate at 2% despite annual price growth rising to 2.2% across the 20-member euro bloc in September, up from 2% in August and 1.7% a year earlier.

In the 27-member EU, annual inflation was 2.6% in September, up from 2.4% in August, according to Eurostat.

The ECB said its 26-member governing council’s view of inflation was “broadly unchanged”. It said: “The robust labour market, solid private sector balance sheets and the governing council’s past interest rate cuts remain important sources of resilience.”

Christine Lagarde, the ECB president, said the council’s decision to hold rates was unanimous and came after the balance of risks shifted, but remained balanced, leaving the central bank “in a good place”.

She said: “The EU-US trade deal reached over the summer, the recently announced ceasefire in the Middle East and today’s announcement of progress in the US-China trade negotiations have mitigated some of the downside risks to economic growth. “At the same time, the still-volatile global trade environment could disrupt supply chains, further dampen exports, and weigh on consumption and investment.”

Irene Lauro, eurozone economist at Schroders, said there was growing confidence in the ECB that its policy of low interest rates was supporting a recovery in growth without sparking inflation.

“Political uncertainty in France could weigh on its economy, but elsewhere the outlook is improving and suggests monetary policy is filtering through to the real economy,” she said.

The eurozone economy expanded by 0.2% in the third quarter from the previous three months, according to preliminary data from the European Commission published on Thursday.

The increase was higher than the 0.1% City analysts expected, with the rise driven mainly by strong performances in Spain, which expanded by 0.6%, and a 0.5% increase in France.

The ECB rate decision follows a divergence across the eurozone in prices growth, which the central bank is expected to maintain at about 2%.

Cyprus kept inflation at zero, while it increased modestly to 1.1% in France and 1.8% in Italy and Greece. However, Romania reported an inflation rate of 8.6%, to add to Estonia’s 5.3% and Slovakia’s 4.6%.

The ECB has said it is concerned by the high level of inflation from services, food and energy. However, it has trimmed its main deposit rate to 2% over the past year and a half to about half the rate in the UK and US.

Most analysts said it was likely interest rates would remain on hold while the balance of risks to inflation remained in balance.

Mark Wall, the chief economist for Europe at Deutsche Bank, said: “Where’s the smoking gun for a rate cut? Despite the US tariffs, despite all the various sources of uncertainty, the European economy continues to eke out some growth. Economic ‘resilience’ is keeping the ECB doves in check, and the policy pause on the rails.”

The Bank of England is widely expected to keep its headline rate at 4% when its policymakers meet on 6 November. On Wednesday the US Federal Reserve trimmed its benchmark rate by a quarter point to a range of 3.75% to 4%, the second cut this year.