The European Central Bank is preparing to hold its deposit rate steady at 2.5% this Thursday while leaving the door open for a December rate hike. Investors are anticipating up to three more increases that could push rates to 3.25% to counter oil-driven wage and price pressures. Meanwhile, Christine Lagarde may vacate her post ahead of schedule, potentially shifting to the World Economic Forum by November. To counter severe market stress or contagion from French debt, the bank retains options ranging from flexible reinvestments to activating its Transmission Protection Instrument.
Key points
French government borrowing costs have hit their highest levels in 25 years amid worries…: French government borrowing costs have hit their highest levels in 25 years amid worries over debt and fiscal policy.
Policymakers may flexibly reinvest proceeds from prior asset purchases if severe sovereig…: Policymakers may flexibly reinvest proceeds from prior asset purchases if severe sovereign bond stress persists.
The ECB retains its unused Transmission Protection Instrument to halt unwarranted market…: The ECB retains its unused Transmission Protection Instrument to halt unwarranted market turmoil across the euro area.
Sources checked by our analysis pipeline: 1
The euro zone's central bank has raised interest rates twice since June and is expected to resume monetary tightening in the coming months as policymakers seek to prevent an oil-price shock linked to the Iran conflict from fuelling broader inflation and wage growth.
However, rising government bond yields, particularly in heavily indebted France, have increased borrowing costs for households and businesses, complicating the ECB's efforts to balance persistent inflation risks against deteriorating financing conditions.
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According to Reuters, the ECB is widely expected to maintain its deposit rate at 2.5% at Thursday's meeting while signalling that another increase, potentially as soon as December, remains possible.
Financial markets are currently pricing in roughly three additional rate increases, which would take the deposit rate to 3.25%. Rising oil prices have further intensified concerns that inflation could remain elevated for longer than previously anticipated.
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