ECB holds deposit rate at 2% as inflation diverges across eurozone

The European Central Bank left its deposit facility rate at 2% on Thursday, the third consecutive meeting without a move, as policymakers weighed a pickup in eurozone inflation against signs that the economy is finally gaining traction. The decision, which the governing council took unanimously, came a day after Eurostat reported that annual inflation in the 20-member bloc accelerated to 2.2% in September, up from 2% in August and well above the 1.7% recorded a year earlier.

Inflation divergence complicates the picture

The headline figure masks extraordinary dispersion across member states. Cyprus recorded zero inflation in September. France, the bloc's second-largest economy, saw prices rise just 1.1%. Italy and Greece sat at 1.8%. At the other extreme, Romania posted 8.6%, Estonia 5.3% and Slovakia 4.6%. Such gaps, a spread of more than eight percentage points, make a single monetary policy an awkward fit, yet the ECB's mandate is eurozone-wide.

Services inflation remains the stickiest component, a point the governing council highlighted in its statement. Food and energy prices also continue to exert upward pressure. In the wider 27-member EU, annual inflation was 2.6% in September, up from 2.4% in August, suggesting the inflation dynamic extends beyond the single currency area.

Growth surprise gives the council breathing room

The case for patience was bolstered by preliminary third-quarter GDP data from the European Commission, published the same morning. The eurozone economy expanded 0.2% quarter on quarter, double the 0.1% consensus forecast. Spain led with 0.6% growth; France added 0.5%. Germany, the largest economy, was not broken out in the flash estimate, but the aggregate beat suggests the contractionary phase that haunted 2023 and early 2024 may be over.

Christine Lagarde, the ECB president, told the post-meeting press conference that the council's view of inflation was "broadly unchanged". She said the robust labour market, solid private-sector balance sheets and the cumulative effect of past rate cuts, the deposit rate has been halved from its peak over the past 18 months, remain important sources of resilience. The decision to hold was unanimous.

Risk balance has shifted but remains centred

Lagarde argued that the balance of risks to growth had improved since the summer. She cited three developments: the EU-US trade deal concluded in July, a ceasefire in the Middle East announced in recent weeks, and progress in US-China trade negotiations revealed on the day of the meeting. Together, she said, they have mitigated some downside risks. "At the same time, the still-volatile global trade environment could disrupt supply chains, further dampen exports, and weigh on consumption and investment," she added.

The phrasing matters. By acknowledging both the improvement and the lingering volatility, the ECB is signalling that it sees no urgent need to move in either direction. The deposit rate at 2% is roughly half the equivalent policy rates in the United Kingdom and United States, a gap that reflects the eurozone's weaker growth trajectory but also limits the ECB's room to cut further without widening the differential.

Analysts see a prolonged pause

Mark Wall, chief European economist at Deutsche Bank, captured the prevailing market view. "Where's the smoking gun for a rate cut? Despite the US tariffs, despite all the various sources of uncertainty, the European economy continues to eke out some growth. Economic 'resilience' is keeping the ECB doves in check, and the policy pause on the rails," he said. Most forecasters now expect the deposit rate to stay at 2% well into 2026, with the first move more likely to be a cut than a hike, but only once services inflation shows a decisive turn.

Irene Lauro, eurozone economist at Schroders, struck a similar note. "Political uncertainty in France could weigh on its economy, but elsewhere the outlook is improving and suggests monetary policy is filtering through to the real economy," she said. The reference to France points to the budgetary standoff in Paris, where a minority government is struggling to pass a deficit-reduction plan, a domestic risk that could yet spill over into broader eurozone sentiment.

External benchmarks moving in different directions

The ECB's pause contrasts with the US Federal Reserve, which on Wednesday trimmed its benchmark range by a quarter point to 3.75%-4%, the second cut this year. The Bank of England is widely expected to hold its headline rate at 4% when the Monetary Policy Committee meets on 6 November. The divergence reflects different inflation dynamics: US goods disinflation has been faster, while UK services inflation remains elevated, but both central banks have moved further and faster on the way down than Frankfurt.

For the ECB, the trade-off is acute. Cutting too early risks re-igniting price pressures in a bloc where wages are still rising above productivity. Waiting too long risks choking the nascent recovery, particularly in interest-rate-sensitive sectors such as construction and manufacturing. The governing council's language, "broadly unchanged", "balanced", "in a good place", is deliberately non-committal, preserving optionality for the December meeting when new staff projections will be published.