The European Central Bank left rates unchanged at its recent policy meeting, but officials signaled that elevated energy costs could prompt one more move before year-end. Three policymakers stated that a December 17 hike to lift the deposit facility rate to 2.75% is almost certain barring a steep decline in energy prices. Rising bond yields are already expected to lower cumulative economic growth by 100 basis points and inflation by 90 basis points by 2027-28 relative to September projections. Because these tighter financial conditions help offset high energy costs, officials plan to halt the tightening cycle after December.
Key points
Central bank officials consider a December interest rate hike nearly certain unless energ…: Central bank officials consider a December interest rate hike nearly certain unless energy costs drop sharply.
Elevated bond yields are expected to dampen price pressures by lowering inflation by 90 b…: Elevated bond yields are expected to dampen price pressures by lowering inflation by 90 basis points in 2027-28.
Policymakers plan to halt the tightening cycle after December as broader financial condit…: Policymakers plan to halt the tightening cycle after December as broader financial conditions sufficiently cool the euro zone economy.
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The ECB kept interest rates unchanged at its latest policy meeting on Thursday, in a widely anticipated decision. However, President Christine Lagarde signalled the possibility of another rate increase in December, warning that elevated and rising energy costs were adding to inflationary pressures and risks.
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Three policymakers told Reuters that a rate hike at the December 17 meeting was almost certain, unless energy prices witness a sharp and unexpected decline. Such a move would take the ECB's deposit facility rate to 2.75%.
However, policymakers expect the central bank to pause its rate-tightening cycle after the December increase, as the impact of rising bond yields is likely to dampen economic activity and price pressures over the coming years.
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ECB estimates circulated ahead of Thursday's meeting indicated that the recent increase in bond yields could reduce cumulative economic growth by 100 basis points and inflation by 90 basis points in…
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