Despite high inflation: ECB leaves key interest rate at 2.5 percent

Inflation in the euro area remains well above two percent. Nevertheless, the European Central Bank is leaving the key interest rate at 2.50 percent. The markets are expecting an increase in December.

Despite stubbornly high inflation, the European Central Bank (ECB) is keeping the key interest rate constant for the time being. It left the deposit rate, which is used to control monetary policy, at 2.50 percent. Just a few hours earlier, the ECB had announced the early retirement of ECB boss Christine Lagarde for February 2027, ending months of personnel speculation. Her departure clears the way for a package solution that includes additional leadership positions - including the successor to ECB Director Isabel Schnabel, who will move to the International Monetary Fund at the beginning of January 2027.

The guardians of the euro raised the key interest rate in June for the first time in almost three years and increased it in September. However, with an inflation rate of recently 3.8 percent in the euro area, the central bank is still a long way from its target of 2.0 percent inflation. The ECB therefore remains vigilant: "The ECB Council is firmly determined to align its monetary policy in such a way that inflation stabilizes at the target value of two percent in the medium term," says the text accompanying the interest rate decision.

The financial markets are expecting a further interest rate hike in December if inflation fueled by higher energy prices in the wake of the Iran war does not subside. The monetary authorities have no influence on oil and gas prices. But they want to prevent so-called second-round effects from developing as a result of the expensive energy. This means that wages and prices are rising and inflation is becoming entrenched.

The debt crisis in Lagarde's home country of France is also causing increasing headaches for monetary authorities: the mountain of debt in the euro zone's second-largest economy has risen to a post-war record of 119 percent of economic output. Investors' concerns about the tight budget situation have driven up yields on French government bonds, making the government's borrowing noticeably more expensive.

With the Transmission Protection Instrument (TPI), the ECB has a program with which it can buy unlimited government bonds from a euro country in distress. However, the prerequisite for this is that the rising borrowing costs are not due to the country's own fault and that the markets react disproportionately.