DWS: ECB caught between inflation risks and tighter financing conditions

DWS: ECB caught between inflation risks and tighter financing conditions

October 30, 2026

Interest Rates ECB

Ulrike Kastens, Senior Economist at DWS, comments on yesterday's ECB meeting:

'Although questions at the ECB press conference were dominated by the resignation of ECB President Lagarde, the market’s focus should nevertheless be on the shift in monetary policy communication.

Two opposing forces are at play. First, the sharp rise in energy prices has exceeded the assumptions underlying the September projections, pointing to a further increase in inflation. Second, financing conditions have tightened significantly, which is likely to weigh on both inflation and growth.

This point was explicitly highlighted in the opening statement and was likely the decisive factor behind the decision to keep the deposit rate unchanged at 2.50%. Although some ECB members had initially argued in favour of a rate hike given the increased inflation risks, the decision was unanimous.

Overall, the ECB still has a tightening bias on interest rates. Lagarde emphasised that the direction of travel is clear, suggesting that a rate hike in December remains possible. Ultimately, however, the decision will depend on the data, particularly the underlying inflation trend, which has so far proved remarkably stable.

That said, the ECB’s communication now appears significantly more balanced. In particular, the emphasis on tighter financing conditions has shifted the overall tone towards fewer rate hikes than markets had previously anticipated.

Furthermore, tensions surrounding France are likely to persist in the coming months. As in previous statements, Lagarde emphasised that the ECB has the tools to counter unwarranted and disorderly market dynamics.

ECB President Lagarde’s resignation effective 7 February 2027 gives euro-area heads of state and government an opportunity to seek a package deal for the vacant Executive Board positions.

Current polls suggest that Hernández de Cos, the former Governor of the Bank of Spain, and Klaas Knot, the former Governor of the Dutch central bank, are the frontrunners for the ECB presidency. However, it remains to be seen whether euro-area leaders share this assessment.'

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