ECB explains two rate hikes to the IMF: the euro angle

The European Central Bank has explained to the IMF's main policy committee why it raised interest rates twice this year, in a statement published by the BIS on 2026-10-20. Euro area inflation reached 3.8% in September, and the ECB says energy is the main reason. This article looks at what the statement says and how a central bank's rate choices can move the euro in principle.

What the ECB told the IMFC

The IMFC is the committee that steers the International Monetary Fund. According to the BIS, which published the text, the ECB used its statement to sum up its recent decisions.

The headline decision is simple. In September the ECB Governing Council added 25 basis points to its key rates, after a rise of the same size in June. A basis point is one hundredth of a percentage point, so 25 basis points is a quarter of a point.

The reason is inflation. Headline inflation, which counts every item in the price basket, rose to 3.8% in September. The ECB says most of the jump came from energy, with food and services adding a smaller push. Core inflation, which leaves out energy and food, edged up to 2.5%. The statement adds that wages have not yet reacted in a material way to the energy shock.

How the ECB decides: three tests

The ECB calls its decision method a reaction function. The statement lists three tests: the inflation outlook and its risks, the trend in underlying inflation, and how strongly policy passes through to the real economy.

On the first test, the ECB expects higher energy costs to keep headline inflation well above its target into the first half of 2027, before easing back near target towards the end of 2027. It sees risks tilted to the upside, citing the Middle East conflict, Russia's war against Ukraine and extreme weather that could lift food prices.

On the third test, the bank notes that borrowing conditions have tightened, as long-term rates have climbed notably since its previous meeting. It expects this to slow growth, with risks to growth leaning down.

The ECB summed up its stance in plain terms: the energy shock is too big to ignore, but it still sees a measured policy response as the right way to contain inflation. The bank also says future moves will depend on incoming data. It gives no preset path for rates.

Why currencies care about rate decisions

This is the part that matters most for a forex beginner. A currency is partly a bet on the interest rate it pays. When a central bank raises rates, holding that currency can become more rewarding than holding one whose rates stay put. In principle, that can draw money towards it.

In a pair such as EUR/USD, the euro is the base currency and the US dollar is the quote currency. The price tells you how many dollars one euro buys. If traders come to expect higher euro rates compared with dollar rates, the pair can rise. If they expect the gap to narrow, it can fall. A move of one pip in EUR/USD is a change in the fourth decimal place of that price.

The key word is expect. Markets try to price decisions before they happen. A hike that everyone saw coming may barely move the euro. What moves a pair is surprise: a different decision, or new wording about the future. That is why a statement like this one matters even though it contains no new decision. Phrases such as measured response and no preset path tell traders how the bank may think next time.

Other forces can work against the rate effect. Weaker growth can weigh on a currency, and energy shocks or wars can move the euro for reasons unrelated to rates.

Beginner risk check

Central bank days and inflation releases are some of the busiest moments in the forex calendar. Keep these points in mind:

• Volatility: prices can jump in both directions within seconds of a decision or a speech, and a first move often reverses.
• Spreads: the gap between the bid and ask price often widens around big news, so trading costs rise exactly when moves are fastest.
• Leverage: borrowed exposure makes a fast move hit your account harder, so leveraged forex trading can lose money quickly; a stop loss may fill at a worse price than you set in a sudden jump.

A demo account lets learners watch how EUR/USD behaves on news days without putting money at risk. Real trading carries the risk of loss, and leveraged forex losses can build up fast.

What else the statement covered

The ECB also gave an update on EUREP, a repo facility that lets other central banks borrow euros from the Eurosystem against collateral. Its operating rules were set in July, and more than 30 central banks have shown interest within six months. The ECB says the facility helps its policy reach the economy smoothly and strengthens the euro's international role.

On the digital euro, the bank plans an internal pilot lasting 12 months during the second half of 2027. For currency watchers, each new inflation reading will feed the ECB’s three tests, and the wording around its next decision is what the euro may react to.

Sources

• BIS, 20 Oct 2026

This article was produced by AI from the cited sources and published automatically after automated checks (figures traced to sources, no copied phrasing); it was not edited by a person. It is beginner education, not trading advice.