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Essentials of Monetary Policy

The European Central Bank Shifts Down a Gear

October 29, 2026
Nom du rédacteur
Mirza Shaheryar Baig
Foreign Exchange Strategist

According to the European Central Bank (ECB)

  • Dovish hold: inflation pressures remain contained.
  • TPI remains available against market dysfunction.
  • Limited tightening: one more hike, then cuts in H2 2027.

Comments

The ECB held rates in a unanimous decision, with the statement leaning dovish. High energy prices have not spilled over into wages, leaving underlying inflation “broadly stable,” while tighter financial conditions were flagged as an additional drag on growth and inflation. The pace of balance sheet run-off was left unchanged.

Energy prices are now above the ECB’s baseline scenario. President Lagarde noted this skews the risks to inflation to the upside. But in our view, the real take-away is that the inflation language is now balanced with limited second-round effects and downside risks to growth.

President Lagarde reiterated that the Transmission Protection Instrument (TPI) will be used if market dysfunction impairs policy transmission. Unfortunately, markets will continue to question the credibility of sovereign finances. The ECB faces a difficult trade-off between price stability and financial stability.

We believe scope for further tightening is limited. On balance, we continue to expect a final 25bp rate hike in December, though this now appears to be a close call. In addition, we are now penciling in a 25bp rate cut in H2 next year.

2026 Schedule of Central Bank Meetings

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