The European Central Bank voted to hold interest rates steady on Thursday, meeting market expectations, despite euro zone inflation rising to a three-year high.
It keeps the central bank's key rate, the deposit facility, at 2.5% following a 25 basis point hike in September.
In a statement, the institution's Governing Council said rising energy prices posed upside risks to the inflation outlook and downside risks to growth, but that underlying inflation and wages were so far broadly stable.
"At this point in time we are not seeing second round effects in addition to what is already included in the projections" released in September, ECB President Christine Lagarde told CNBC's Annette Weisbach during a press conference.
Lagarde identified the main developments since the ECB's last meeting as higher energy costs across oil, petrol, fuel, gas and refining margins, and a sharp rise in long-term financing costs, with the average 10-year sovereign yield up by around 35 basis points.
"If you combine these two factors — actually, the Governing Council debated whether a hike was appropriate — but on the basis of the uncertainty that accumulates and that rises as well, on the basis of underlying inflation that has broadly remained unchanged, the Governing Council unanimously decided that we were well positioned enough at this stage to hold and that a measured approach at this point in time remained appropriate," Lagarde said.
Headline inflation in the euro area hit 3.8% last month, the highest level since September 2023. Energy price inflation reached 18.8% amid continued turbulence in the Middle East.
The resurgence in energy price pressures following the outbreak of the U.S.-Israeli war with Iran in February saw the ECB hike rates in June for the first time since 2023.
The euro area economy continued to expand in the third quarter of the year, with a recovery in services since the start of the Middle East conflict, the Governing Council said in an explanation of its decision Thursday.
Manufacturing, digital services and exports are being boosted by AI-related investments, while government spending on infrastructure and defense is supporting business activity. However, energy price pressures are likely to hit consumer confidence as higher financing costs weigh on growth.
"Predicting the path of ECB monetary policy is becoming more challenging," Deutsche Bank's chief European economist, Mark Wall, said in a note on Thursday.
"One question is whether the two hikes already delivered and the tightening of financial conditions since September are enough to lean against the further increase in energy inflation risk? Probably not."
Wall said the other main question was whether the looming departure of Christine Lagarde as ECB president — a decision she announced earlier on Thursday — would impact decision-making next year.
"We think the institution is bigger than the person, but there's uncertainty. We expect one more hike to 2.75% in December while Lagarde is still President, and that's probably the end of the hiking cycle."
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