The 18.8% Problem: How an Energy Shock Is Rewriting Europe’s Rate Path

A unanimous vote and a “no brainer”

On 10 September, at a meeting held in Berlin, the ECB’s Governing Council raised the deposit facility rate to 2.50%, the main refinancing rate to 2.65% and the marginal lending rate to 2.90%, effective 16 September. The vote was unanimous. President Christine Lagarde called the decision a “no brainer”.

The accompanying statement said that the conflict in the Middle East continues to generate inflation pressure and that inflation will stay well above target for an extended period. The new staff projections put average inflation at 3.0% this year, 2.5% in 2027 and 2.1% in 2028, with a return to 2% now seen at the end of 2027. Core inflation is projected at 2.5%, 2.6% and 2.3%. Lagarde described the outlook as highly uncertain, with risks tilted to the upside for inflation and to the downside for growth. Reuters noted that the projections were finalised before the latest energy price moves, and some economists regarded them as already out of date.

The war sets the ECB’s calendar

The central bank’s year can be read as a response to events in the Gulf. The timeline below follows the war, the energy market and the ECB’s decisions side by side. When a truce in July seemed set to ease energy prices, the ECB paused. When attacks resumed in late August and oil moved back above US$100 a barrel, it raised rates again. Lagarde also cited the war in Ukraine as a continuing source of price pressure, according to Il Foglio’s report of her remarks.

How the war set the rate path

Key events in 2026, from the start of the conflict to the next ECB meeting.

1. Late FebruaryThe war with Iran begins, according to press reports.
2. 11 JuneThe ECB raises its deposit rate from 2.00% to 2.25%, its first increase since September 2023.
3. 23 JulyThe ECB pauses. A truce in the Gulf appeared set to ease pressure on energy prices.
4. Late AugustRenewed attacks by the United States and Iran on military, shipping and energy assets send oil back above US$100 a barrel.
5. 10 SeptemberThe ECB raises all three key rates by 25 basis points. The deposit rate reaches 2.50%.
6. 2 OctoberEurostat’s flash estimate puts September inflation at 3.8%, the highest since 2023.
7. 29 OctoberThe next ECB meeting. Eurostat publishes the final September inflation figures on 16 October.

September’s shock: 3.8% and the 18.8% problem

Eurostat’s flash estimate, published on 2 October, put euro area inflation at 3.8% in September, up from 3.2% in August. It was the highest reading since September 2023, above forecasts of about 3.6% to 3.7%, and the third consecutive month of acceleration from 2.8% in June.

Energy explains most of the move. Energy prices were 18.8% higher than a year earlier, against 14.3% in August. Services inflation rose to 3.2% from 3.0%, and food, alcohol and tobacco to 1.4% from 1.1%, while non-energy industrial goods edged down to 1.1%. Core inflation, which excludes energy, food, alcohol and tobacco, rose only to 2.5% from 2.4%.

Euro area inflation is accelerating

Annual HICP inflation, June to September 2026. September is a flash estimate.

Energy is the story

Annual inflation by component, August and September 2026 (flash).

AugustSeptember (flash)

Four economies, four speeds

The national figures show how unevenly the shock is arriving. Germany’s inflation rose to 3.3% from 2.9%. France’s moved to 3.4% from 2.6%, Italy’s to 4.1% from 3.2% and Spain’s to 5.0% from 4.6%. Italy and France recorded the largest jumps, at 0.9 and 0.8 percentage points. Spain, at 5.0%, is 1.2 percentage points above the euro area figure of 3.8%.

A single policy rate must serve all of them, and the same 2.50% deposit rate is a different proposition in Madrid and in Frankfurt. That tension is one of the reasons the ECB prefers to decide meeting by meeting.

Four large economies, one policy rate

Annual inflation, August and September 2026 (flash).

AugustSeptember (flash)

Why core inflation is the real test

The ECB raised rates while core inflation was easing, which can look puzzling. The bank’s reasoning is preventive. In its assessment, wages have not yet responded significantly to the energy shock, but the longer energy costs stay high, the greater the risk that they spread into other prices, wages and inflation expectations. One economist described the September increase as a step to stop second-round effects from emerging, not a reaction to inflation that had already got out of hand.

Board member Olli Rehn said after the flash release that energy prices were approaching the levels in the ECB’s adverse inflation scenario. That is a more cautious signal than the September statement, and it explains why a pause in October is not simply assumed.

6Growth and jobs: resilient, for now

The real economy has held up better than many feared. Euro area GDP grew 0.6% in the second quarter and 1.2% over the year, according to Eurostat, with France flat at 0.0% and Spain at 0.7%. Unemployment was 6.4% in August, unchanged from July, with France at 8.2%. The ECB raised its growth forecasts for this year and next in September.

The risk is on the other side of the ledger. Lagarde noted at the end of September that high market interest rates could slow growth and weaken the pass-through of expensive energy to other prices. In other words, the tightening already under way may do part of the ECB’s work.

The euro slips

The euro lost ground around the inflation release. On 2 October, the ECB’s reference rates showed the euro down 0.65% against the US dollar, 1.67% against the Swiss franc and 0.84% against the yen. The dollar rate fell from 1.1355 on 29 September to 1.1225, and recovered to 1.1269 on 6 October. A weaker euro raises the euro cost of dollar-priced oil, so it adds to the very pressure the ECB is trying to contain. The Federal Reserve’s target range of 3.75% to 4.00% is now 1.5 points above the ECB’s deposit rate at its upper bound.

The euro against the dollar

US dollars per euro, ECB reference rates.

Three paths to 29 October

The ECB meets on 29 October. Some analysts expect it to pause, while others expect a third increase. MUFG, which had forecast further increases, shifted its view toward a pause after gas prices retraced and core and services pressure stayed contained, provided energy does not escalate again. The table sets out how the evidence could point in each direction. It is our analytical judgement, not a forecast.

Scenario	What it would look like	Likely stance
Pause	Gas and oil prices stay below their peaks, core and services inflation hold near 2.5% and 3.2%, and wage settlements remain moderate.	Hold at 2.50% and keep deciding meeting by meeting.
Third increase	Energy prices climb toward the ECB’s adverse scenario, services and core inflation rise further, and wage demands begin to reflect the shock.	Another 25 basis point increase, to a 2.75% deposit rate.
Growth scare	Activity weakens as higher energy costs and market rates bite, and unemployment starts to rise from 6.4%.	Pause, with greater emphasis on the downside risks to growth.

What to watch

Four things will decide it. The first is Eurostat’s final September inflation figure on 16 October, which will confirm or revise the 3.8% flash. The second is the price of oil and gas, and any further disruption in the Strait of Hormuz. The third is core and services inflation, and the fourth is wage settlements. Behind them stands the 29 October meeting, which will show whether the ECB regards the energy shock as something to look through or something to lean against.