ECB holds all three key rates unchanged as energy shock clouds outlook

The European Central Bank's Governing Council voted to keep its three key interest rates unchanged, ECB President Christine Lagarde and Vice-President Boris Vujčić announced at a press conference Thursday.

Energy prices have continued to rise, the ECB said, creating upside risks to the inflation outlook and downside risks to growth. Underlying inflation has remained broadly stable so far, and wages have not shown a material response at this stage, but the ECB warned that the magnitude and duration of the energy shock — and its indirect and second-round effects — are likely to drive inflation higher and growth lower.

Financing conditions have also tightened since the last meeting, which the Governing Council said would weigh on both inflation and growth.

On the economy, the ECB said incoming data suggest the euro area continued to expand in the third quarter. Services have recovered after weakening earlier in the year, and manufacturing, digital services and exports are benefiting from AI-related business investment. Government spending on infrastructure and defence is also supporting activity. The unemployment rate stood at 6.4 per cent in August.

Over the medium term, the ECB said a recovery in real incomes — driven by gradually declining energy prices and a robust labour market — should bolster domestic demand, while AI-related investment and government infrastructure and defence spending should continue to support growth.

The Governing Council reiterated its commitment to returning inflation to the 2 per cent target and said it would follow a data-dependent, meeting-by-meeting approach. "We are not pre-committing to a particular rate path," Lagarde said.