The European Central Bank kept its deposit rate at 2.5%, in line with market expectations, despite euro area inflation reaching 3.8%, its highest level since September 2023. Energy prices surged by 18.8%, driven by tensions in the Middle East, while the average 10-year sovereign yield rose by around 35 basis points. Money markets subsequently priced in a roughly 67% probability of a rate hike in December. ECB President Christine Lagarde said underlying inflation and wages remained broadly stable, but warned that rising energy prices presented upside risks to inflation and downside risks to growth. The decision was described by economists as a hawkish pause rather than the end of the tightening cycle.
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