The market consensus anticipates that the European Central Bank (ECB) will choose to keep the money price unchanged at the meeting this Thursday, thus chaining a pause after the increase of 25 basis points applied in September. However, experts continue to point to a new upward movement before the year ends.
The outlook in the eurozone complicates with inflation at a three-year high, standing at 3.8% in September after rising six tenths in just one month; the increase in sovereign debt yields in the main economies, with France under special scrutiny for its fiscal imbalances, and a tense political climate that has led to strong protests in several member states.
In this context, the European monetary authority is likely to opt to keep interest rates at current levels at the meeting this Thursday, October 29. Thus, the deposit rate (DFR) will remain at 2.5%, the main refinancing operations rate (MRO) at 2.65%, and the marginal lending facility (MLF) at 2.90%, with the idea of gaining maneuvering room and arriving at the December meeting with a more complete diagnosis.
"A rate hike this week would be a big surprise. The probability is practically nil, as inflation has remained controlled, France has prompted a downward revision of prices, and President Christine Lagarde has shown herself to be somewhat less belligerent," indicated ING Think analysts Francesco Pesole, Michiel Tukker, and Carsten Brzeski.
The underlying inflation of the euro area, which excludes energy, fresh food, alcohol, and tobacco, stood at 2.5% in September, advancing only one tenth. This figure suggests that, for now, the second-round effects have not yet appreciably transferred to the region's economy.
"Although we are currently observing higher inflation, there are still no signs that it is being incorporated durably. Indirect effects remain contained and second-round effects are not evident," explained Pimco portfolio manager Konstantin Veit.
The tension in France reinforces the ECB's pause
France is suffering increasing pressure in the debt markets, with the yield on the ten-year bond having recently surpassed 5%, its highest level since 2002. Investors are thus demanding a higher premium to finance the French state, in an environment of concern about the sustainability of its public accounts. This distrust is also reflected in the French risk premium, with the spread between the French bond and the German bond (Bund) hovering around 160 basis points.
"The tightening of financial conditions reinforces the arguments in favor of a pause, and the downside risks are increasing. Long-term yields have risen considerably and sovereign debt spreads have widened, especially in France, which has caused a tightening of financial conditions across the eurozone," stated Josefina Rodríguez, economist at Vanguard.
According to analysts from Natixis IM, Mabrouk Chetouane and Romain Aumond, it is very likely that Lagarde will make direct reference to the French case in the press conference following the decision, which would represent "a signal that the central bank takes seriously the volatility affecting the fixed income markets."
"Without the need to activate the instruments against financial fragmentation, the recognition of these risk factors, on one hand, and the suspension of the quantitative tightening process, on the other, would send strong signals from the ECB, aimed at containing the pressures on sovereign debt markets," it has been argued.
Markets awaiting a rate hike in December
Despite the instability of French bonds and other issuers in the region, investors believe that this spike in volatility will not be enough for the ECB to abandon its restrictive strategy, initiated in May after the start of the Iran war, and they are already discounting a new increase in the cost of money in December.
"In this scenario, we are discounting an additional rate hike in the December meeting, which would bring the deposit facility to 3% by the end of 2026. From here, looking ahead to 2027, the evolution of the growth and price data that we will learn will be key to discussing new hikes," stated Cristina Gavín, head of Fixed Income at Ibercaja Gestión.
Experts predict that Lagarde's message will remain in line with her latest public appearances and that she will reiterate her determination to bring inflation back to the target, something that will serve as guidance to the markets on possible additional adjustments in monetary policy.
"It is likely that Christine Lagarde will reiterate that the risks to inflation remain skewed to the upside and the risks to growth to the downside, while highlighting the resilience of the European economy," emphasized François Rimeu, senior strategist at Crédit Mutuel AM.