The economic picture in the euro area remains affected by the geopolitical situation and the resulting energy shock. Economic activity remains resilient for now, and broadly based, while inflation is gradually rising, driven largely by higher energy prices, and remains above 3%. Core inflation, i.e. inflation excluding food and energy prices, remains moderate for now.
In these circumstances we took the decision on the Governing Council to leave the ECB’s key interest rates unchanged following the rise at the previous meeting. The interest rate on the deposit facility, which best reflects the monetary policy stance, thus remains at 2.5%. Our assessment is that this interest rate level gives us the flexibility to respond appropriately to all possible outcomes of the geopolitical tensions and their potential consequences for inflation. We will maintain our approach to future decision-making, deciding on monetary policy measures on a meeting-by-meeting basis.
The economic picture in the euro area remains affected by the energy shock, which is being reflected in particular in higher inflation, while economic activity for now remains resilient to the effects of the shock. Inflation strengthened to 3.8% in September, mostly in reflection of an uptick in energy price inflation, amid slight rises in food and service price inflation. Energy price inflation strengthened to 18.9% in September, primarily as a result of continuing rises in energy prices on global markets in connection with the persistent instability in the Middle East. Core inflation excluding food and energy prices remained more moderate, at 2.5%. This indicates that on this occasion the shock is not yet passing through into broader inflationary pressures via second-round effects. The monthly indicators of economic activity meanwhile suggest that the favourable economic developments from the second quarter continued in the third quarter and the early part of the final quarter. Economic growth remains broad-based, with positive conditions in manufacturing and in services. The global investment cycle in the field of AI and government investment in defence and infrastructure are significant stimulus factors on the demand side. Meanwhile high energy price inflation poses an upside risk to the inflation outlook, and a downside risk to the economic growth outlook.
The financial markets are continuing to reflect market participants’ uncertainty with regard to the situation on the energy market. Energy prices remain elevated and volatile, with an uncertain outlook, in part because of low energy stocks before the winter. This is strengthening the risk of more sustained inflationary pressures. The market inflation expectations suggest that inflation in the euro area might remain above 2% over the coming years. Other concerns to the fore in the euro area were those regarding the strengthening of political risks and their impact on the sustainability of fiscal policy in certain countries. Spreads between government bond yields and the German benchmarks widened in response. At the same time there was a significant fall in share prices in the AI sector, which was also reflected to a limited extent in shares in other sectors. European share indices fell slightly. The financing conditions therefore tightened, which was partly compensated for by the slightly reduced expectations with regard to the restrictiveness of ECB monetary policy.
In light of this data, the Governing Council decided at yesterday’s meeting to leave interest rates unchanged. The interest rate on the deposit facility, which best reflects the monetary policy stance, thus remains at 2.50%. The Governing Council’s future decisions will remain focused on seeing inflation stabilise at its 2% target rate over the medium term. The next steps will be based on an assessment of the inflation outlook and the risks surrounding it, the dynamics of underlying inflation, and the strength of monetary policy transmission. The monetary policy stance will continue to be decided on a meeting-by-meeting basis.