ECB weighs rate stance after September data

Eurozone inflation rose to 2.2% in September, breaking above the European Central Bank’s target for the first time since April. The jump from 2.0% in August came as service prices increased and energy costs fell at a slower pace.

New figures from Eurostat showed the change matched forecasts in a Reuters poll of economists. The report also confirmed that a key core inflation measure, which strips out food and fuel, held steady at 2.3%, even as services costs moved higher.

The increase is already shaping how markets and policymakers view the ECB’s next steps. The central bank has held interest rates at 2% after a sharp cycle of cuts and now faces questions on whether the rise in prices will delay future moves.

Data released Wednesday also noted the trend of steady core prices alongside stronger services inflation. The details point to a complex mix for policymakers ahead of their October 30 meeting, which will be the third straight session with rates on hold if no change is made.

ECB weighs rate stance after September data

The European Central Bank has spent four years trying to bring down inflation. Yet officials do not see this month’s rise as a sign of a new problem. They say broader trends still point to prices falling back toward and below the 2% target. ECB President Christine Lagarde said on Tuesday, “As we can model the future, the risks to inflation appear quite contained in both directions.

With policy rates now at 2%, we are well placed to respond if the risks to inflation shift, or if new shocks emerge that threaten our target.” This signals that the bank is ready to act but is not panicking over one month’s figure.

Some policymakers, however, are expected to use the September reading as an argument to hold off on further easing. This includes those who fear that cutting rates again could risk destabilizing price expectations. The ECB is almost certain to keep rates at their current level for a third straight meeting on October 30. Financial investors show a similar view. They see only a 10% chance of another rate cut later this year and a 30% chance of a cut by mid-2026. These market odds reflect comfort with the ECB’s current stance despite the uptick in headline inflation.

Policymakers warn of inflation slipping too low

Inside the Eurozone, the bigger fear for some officials is not high inflation but inflation staying too low. The ECB forecasts price growth dipping to 1.7% next year and holding under target for six consecutive quarters. This would be long enough for retailers and employers to change how they set prices and wages. Some policymakers argue this could entrench weak price growth, much like in the pre-pandemic decade, when the ECB slashed rates below zero and printed trillions of euros to spur the economy, but still could not lift inflation.

This argument is backed by weak numbers for industry, investment, and household spending, which all point to a slowdown. The economy is also facing pressure from U.S. tariffs, which add another layer of risk. Yet the more hawkish side of the ECB says these fears are overstated. They believe the economy is strong enough to handle trade tensions, with industry rebounding, jobs staying solid, and defense spending rising to support growth.

For now, the bank will wait and see before moving rates again. This comes after it already cut rates by two full percentage points in the year through June. The path ahead will depend on how quickly the picture clears up and whether inflation truly drifts back below target or proves stickier than expected.

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