The European Central Bank (ECB) published its Economic Bulletin, Issue 7, assessing how a prolonged energy shock is raising inflation risks and weakening the euro area growth outlook. Higher energy prices and tighter financing conditions are expected to dampen activity, while underlying inflation remains broadly stable and wages show no material response to the shock so far. The bulletin reviews the Governing Council’s Oct. 29, 2026, decision to leave interest rates unchanged, with the deposit facility, main refinancing operations and marginal lending facility rates at 2.50%, 2.65% and 2.90%, respectively.
Annual inflation rose to 3.8% in September from 3.2% in August, driven mainly by energy inflation of 18.9%. Energy prices have exceeded the baseline assumed in the September staff projections, making headline inflation likely to remain well above the 2% target over the coming quarters. A longer shock increases the risk that energy costs spread more broadly into prices and wages. However, annual compensation growth slowed to 3.3% in the second quarter from 3.6% in the first, and most measures of longer-term inflation expectations remain around 2%.
Economic activity continued to expand, supported by recovering services, investment related to artificial intelligence and government infrastructure and defence spending. Eurostat’s preliminary estimate put third-quarter growth at 0.4%, or 0.2% excluding volatile Irish data. Renewed energy price increases have weakened consumer confidence, while tighter credit conditions are restraining borrowing. Banks tightened corporate lending standards more than expected in the third quarter, and higher interest rates reduced demand for business loans and mortgages. Banks expect further tightening of corporate credit standards and significant tightening for housing loans and consumer credit in the fourth quarter.