The European Central Bank's September meeting minutes, released on the evening of Thursday, October 8, confirmed that the decision to raise interest rates by 25 basis points was driven by a deteriorating inflation outlook. By the time the ECB met in September, a 25 basis point hike had already been viewed as the most likely outcome. The minutes showed that the ECB Governing Council unanimously agreed that the worsening inflation outlook and economic resilience required a rate increase. However, the picture presented by the minutes was less hawkish than that conveyed by ECB President Lagarde at her press conference.

Deteriorating Inflation Forecasts Drove the Rate Hike, with the Deposit Rate Raised from 2.25% to 2.50%

The updated staff projections clearly showed that inflation would remain significantly above the ECB's 2% medium-term target for an extended period. This assessment formed the core basis for raising the deposit facility rate from 2.25% to 2.50%. Although current underlying inflation indicators have not yet shown marked acceleration, the full pass-through effects of the energy price shock have not yet fully materialized, and forward-looking risks therefore warranted early policy action. The Council considered that, under a broad range of scenarios, this rate hike was a sound and necessary decision capable of effectively addressing the potential threat of inflation expectations becoming unanchored. Persistently elevated energy costs not only directly push up headline inflation but may also indirectly affect the broader price system through supply chain and production cost channels. Staff models showed that without a timely adjustment of the policy stance, the duration of inflation deviating from target would be significantly prolonged, thereby increasing the need for larger subsequent tightening. Raising rates by 25 basis points both reflected a timely response to the latest projection data and conveyed the central bank's firm commitment to price stability. At the same time, the decision-making process fully took into account the policy effects under different scenarios, ensuring that monetary policy could maintain sufficient flexibility and forward-looking orientation against the backdrop of lingering inflation risks. This adjustment does not mean that the policy path has been pre-committed, but rather represents a prudent choice based on the current information set, preserving room for further calibration of interest rate levels in response to evolving data. Overall, the deterioration in the inflation outlook was the key factor driving this rate hike, and the Council hoped that timely action would prevent temporary shocks from evolving into more persistent inflation problems.

Some Members Noted Inflation Risks May Be Less Persistent Than Assumed, with Reservations About the Resilience Narrative

Not all Council members fully agreed with the judgment that inflation risks would persist over the long term. Some members pointed out that the current energy shock is inherently strongly politically driven, and its persistence may be far weaker than depicted in the baseline assumptions, and it could even fade as quickly as it appeared. Based on the latest published economic growth data, it is still too early to draw definitive conclusions about the degree of economic resilience, and therefore the "resilience narrative" did not receive unanimous support. These reservations reflected that the Council's assessment of the inflation outlook was not monolithic, with some members believing that the persistence of energy price increases may have been overestimated, leading to an overly pessimistic judgment on the medium-term inflation path. They emphasized that geopolitical factors are highly uncertain, and once related tensions ease, energy prices could fall rapidly, thereby reducing upward pressure on inflation. At the same time, the latest economic activity indicators showed that although economic momentum has some support, it has not yet formed clear evidence sufficient to confirm strong resilience. Prematurely reinforcing the narrative that "the economy can withstand higher interest rates" could underestimate potential downside risks. The existence of these differing voices made the decision-making process more prudent and also prompted the Council to avoid overly confident expressions in its communication. Ultimately, although the mainstream judgment still supported the rate hike, internal differences over the persistence of the shock and economic resilience demonstrated that uncertainty was fully taken into account in the policy-making process and left room for future position adjustments based on data.

The Risk of Energy Prices Passing Through to Food Remains, but Indirect Effects Have Been Limited So Far

The chain transmission risk triggered by rising energy prices still warrants vigilance. Rising energy costs not only directly push up production and transportation expenses but may also further transmit to food prices through channels such as fertilizer prices. Combined with the negative impact of El Nino and recent heatwaves on agricultural production, the possibility of upward pressure on food commodity prices has increased somewhat. However, to date, indirect effects remain relatively well contained, and second-round effects have not yet become apparent. Some members noted that the gradual cooling of the labor market and slowing wage growth help limit the spread of cost-push inflation. This balanced perspective indicates that while the ECB is closely monitoring the risk of inflation broadening, it also recognizes that the current price transmission chain has not shown signs of spiraling out of control. The full impact of the energy shock will take time to manifest across the broader price system, so continued monitoring of food prices, core inflation, and the potential formation of a wage-price spiral remains a priority in policy assessment. The Council considered that although upside risks exist, current data do not show that indirect effects have significantly disturbed inflation expectations. By remaining vigilant and adjusting policy as appropriate, preventive measures can be taken before risks actually materialize. Overall, although the transmission path from energy to food deserves attention, its current contained state provides a relatively favorable observation window for policy, avoiding unnecessary tightening that could result from an overreaction.

No Mention of France, Only a General Reference That Rising Long-Term Interest Rates Could Weigh on Growth

In these meeting minutes, France-related topics were barely mentioned at all, with only a general note that a further rise in long-term interest rates could adversely affect economic growth. This silence was particularly noteworthy, as France's fiscal situation is precisely one of the focal points of intense current financial market attention. The ECB may have deliberately avoided directly commenting on the fiscal conditions of a single member state in the public minutes, in order to maintain the generality and independence of policy discussion and prevent it from being interpreted as a public judgment on a specific country's fiscal policy. Rising long-term interest rates themselves may suppress investment and consumption through the financing cost channel, thereby weighing on the overall growth outlook for the euro area. In its discussion, the Council assessed the potential impact of the interest rate path on economic activity more from a macro perspective, rather than focusing on the specific circumstances of individual countries. This approach helps maintain the neutrality and consistency of monetary policy communication and prevents the market from drawing excessive inferences about the central bank's stance. At the same time, it also reflects the ECB's cautious attitude regarding the division of labor between fiscal and monetary domains, with monetary policy focusing on price stability while exercising restraint in specific evaluations of member states' fiscal policies. Although the market has concerns about France's fiscal sustainability, the minutes chose to respond to related risks with more general language, which both reflects the strategic nature of policy communication and preserves flexibility for subsequent responses based on actual data developments. This "no-naming" approach may, in the current complex political and economic environment, be a pragmatic choice for safeguarding the central bank's credibility and policy independence.

The Concept of a Neutral Rate Exists, and 2.50% Remains Within the Staff's Estimated Neutral Range

The Council explicitly acknowledged the existence of the concept of a neutral interest rate and noted that the current deposit facility rate of 2.50% remains within the staff's estimated neutral rate range. This judgment carries important policy implications: even after completing this rate hike, the monetary policy stance has not yet clearly entered restrictive territory, thereby preserving ample room for further interest rate adjustments in the future based on inflation and economic data. As the theoretical interest rate level that neither stimulates nor restrains economic activity, the neutral rate's estimation itself involves considerable uncertainty, but staff models still provide an important reference framework for policy assessment. The Council emphasized that the response should remain measured and avoid overinterpreting the policy implications of a single rate hike. Keeping interest rates near the neutral range means that the current operation is more of a preventive adjustment against inflation risks rather than a forceful tightening after confirming economic overheating. This stance helps stabilize market expectations and prevents investors from simply interpreting this decision as a signal of the start of a tightening cycle. At the same time, it also embodies the gradual and prudent principle of policy-making: against the backdrop of lingering uncertainty in the inflation outlook, priority is given to ensuring that interest rate levels are within a reasonable range, and then subsequent data will determine whether further action is needed. The introduction of the neutral rate concept enables the Council to more clearly define the nature of the current policy stance in its communication, responding to inflation risks while avoiding unnecessary volatility that could arise from prematurely signaling restrictiveness.

No Forward Guidance, Communication Should Remain Neutral

In the context of the current decision, the Council explicitly called for communication to remain neutral, neither implying that this rate hike is another step in a pre-determined tightening cycle nor suggesting that this is the last rate increase. Maintaining vigilance on an ongoing basis is crucial. The minutes as a whole show that the ECB believed the September rate hike itself posed no significant risk, but its forward-looking judgment was more balanced and prudent compared to the public comments at the press conference. This communication strategy aims to prevent the market from forming rigid expectations about the policy path, thereby preserving room for flexible adjustment based on the latest data. The approach of no explicit forward guidance reflects the Council's clear awareness of the high degree of uncertainty surrounding the current economic and inflation outlook: the energy shock, geopolitical developments, and the resilience of economic activity all involve considerable variables, and prematurely locking in a policy path could weaken the ability to respond. By emphasizing neutral communication, the central bank hopes to convey to the market the core principle of "data dependence," meaning that future rate decisions will be strictly based on the actual evolution of inflation and economic growth, rather than a pre-set timetable. At the same time, the expression of continued vigilance also reminds the market that inflation risks have not been fully eliminated, and the policy stance may be adjusted at any time based on new information. This balanced communication approach helps reduce market volatility while maintaining the central bank's policy credibility in a complex environment. Overall, the stance presented in the minutes was more prudent than public statements, reflecting the depth of internal discussion and full consideration of uncertainty.

The Short-Term Direction of the Euro Still Depends on France and the Federal Reserve

The direct impact of these minutes on EUR/USD is neutral, or even slightly dovish. The market had originally interpreted a more hawkish signal from Lagarde's press conference, whereas the minutes showed that some members believed the energy shock may be less persistent, indirect effects have been limited so far, 2.50% remains within the estimated neutral rate range, and there was an explicit call for communication to remain neutral with no forward guidance. This means the ECB has not locked in a path of further rate hikes, and support for rate expectations has weakened somewhat. At the same time, the minutes made no mention of France throughout, only generally noting that rising long-term interest rates could drag on growth. But what the market is most focused on right now is precisely France's fiscal situation and the French-German spread. If French pressure continues to build, the downside risks for the euro will come more from fiscal and political dimensions rather than monetary policy. Against the backdrop of the Federal Reserve's October rate hike probability falling to 17.7% and weakening dollar interest rate support, EUR/USD may receive some short-term support, but the French situation limits the scope for a rebound. Overall, the exchange rate remains in a tug-of-war between bulls and bears near the 1.12 mark, with direction depending on France's fiscal developments and Fed officials' statements rather than these minutes themselves. (EUR/USD daily chart, source: EasyForex) As of 11:48 Beijing time, EUR/USD was quoted at 1.1224/25.