The ECB keeps interest rates on hold, but points to rising inflation risks

The European Central Bank left interest rates unchanged, in line with expectations, but pointed to mounting inflation risks from surging energy costs, which is likely to boost bets for a December rate hike.

The ECB has raised rates twice this year and remains on track to prevent war-driven inflation getting entrenched and that would likely need further policy tightening, with market expectations for another hike in December.

ECB President Christine Lagarde pointed to upside risks to the inflation outlook and downside risks to the growth outlook, as energy prices continue to rise on persistently fragile situation in the Middle East.

Lagarde added that underlying inflation had remained broadly stable and wages had not shown a material response to higher prices although the increased magnitude and duration of the energy shock were likely to drive up inflation and undermine growth.

She also pointed to fragile financial and political conditions in some bloc’s economies, with focus on France that may further complicate central bank’s job.

This says that the ECB will face a difficult task in attempts to curb inflation, which is already nearly twice the 2% target, but will need to minimize risk of creating broader financial instability.

The ECB President Christine Lagarde also announced her resignation today, ending months of speculation about her future just as Europe enters a period of rising economic volatility and divisive electoral politics, particularly in her native France.

Lagarde will step down on February 7, giving current European Union leaders time to pick her successor.