ECB Balances Growth Concerns Against Sticky Services Inflation

The European Central Bank kept its deposit facility rate unchanged at 2.75% on Thursday, its third consecutive hold, while signaling that the balance of risks has shifted toward the growth side of the mandate.

President Christine Lagarde noted in the press conference that euro area GDP is now expected to grow 0.8% this year, down from the 1.1% projected in June. Germany remains in recession, with manufacturing output down 4% year-over-year.

Inflation, meanwhile, remains stubbornly above target in the services sector. Headline HIPC was 2.1% in September, but services inflation ran at 3.9%. Wage growth is decelerating but still at 4.3% year-over-year.

"We are in the uncomfortable middle," said Ingrid Bauer, chief euro area economist at Rheinbank. "Growth is weak enough to warrant easing, but services inflation is strong enough to make easing politically difficult."

Markets now price roughly 55 basis points of ECB cuts by end-2027, down from 78 basis points two weeks ago. The next meeting in December is seen as the most likely venue for the next move, though a hold is far from ruled out.

Fiscal policy is emerging as the more consequential variable. Germany's constitutional court ruling in August opened the door to a substantial infrastructure package, and France has announced defense spending increases that will breach EU fiscal rules through 2028.