ECB Flash

The ECB should proceed cautiously because the energy shock has raised headline inflation risks without yet generating meaningful second-round effects.

• The ECB left its deposit rate unchanged at 2.50%, pausing after September’s 25bp hike.
• Rising energy prices are increasing upside risks to inflation while weakening growth, consumer confidence and financial conditions.
• Underlying inflation has remained broadly stable, wages have shown no material response, and there is limited evidence that the energy shock is becoming embedded.
• President Lagarde said AI investment and increased public spending could support activity, while fiscal measures addressing the energy shock should be temporary, targeted and tailored.
• Markets removed around 7bp of expected ECB tightening from the curve by mid-2027, interpreting the meeting as marginally dovish.

Takeaway: Further hikes are possible if energy prices feed into wages, underlying inflation and expectations, but higher headline inflation alone should not trigger a mechanical continuation of the hiking cycle.