European Central Bank: Higher bond yields support an October hold – ING

With the French fiscal crisis and rising bond yields already tightening financial conditions, ING’s Carsten Brzeski expects the European Central Bank to leave policy rates unchanged at its 29 October meeting. In his view, the ECB is likely to defer any rate decision until December, when fresh projections become available. Its stance may also turn more dovish as it assesses oil prices, the pass-through of energy costs and developments in France’s public finances.

ECB set to hold rates as bond yields tighten financial conditions

"Back in September, the ECB surprised markets with a more hawkish message, at least between the lines. With headline inflation higher for longer and core inflation expected to increase in 2027, the stage seemed set for at least one more rate hike at the December meeting. Some even speculated about a back-to-back increase in October."

"One month later, and after a severe fiscal and political crisis in France, the ECB is unlikely to repeat the hawkish tone at next week’s meeting. At face value, macro developments since the last meeting would still justify another rate hike. Headline inflation increased again in September and most leading indicators point to continued resilience in the eurozone economy."

"However, the surge in bond yields on the back of the French crisis is already imposing a new restrictive monetary policy stance. In fact, the surge in German bond yields since the September meeting has already had roughly the same impact on growth and inflation as an additional 25bp rate hike. For France, it's closer to a 50bp hike."

"All of this means that the ECB is very likely to stay on hold next week and will delay any next rate hike decision to December. This is when new staff projections will be available and when there will also be more insights into whether higher energy prices will eventually bring knock-on effects on the rest of the economy or not."

"All in all, next week’s ECB meeting looks set to be uneventful on action but clearly not on words."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)