The ECB’s October meeting is a hold with an argument attached. The deposit rate stands at 2.50 percent after increases in June and September, both responses to the energy-driven inflation that followed the Iran war. Euro area inflation accelerated to 3.8 percent in September, its highest in three years, from 3.3 percent in August, with core inflation at 2.5 percent and energy inflation at 18.9 percent. At face value, ING’s Carsten Brzeski told Morningstar, the data since the last meeting would still justify another hike, and economists surveyed by Reuters expect one in December.
The counterweight is the bond market. French 10-year yields rose above 5.1 percent last week and the German curve sold off with them, and ING estimates the rise in German yields since the September meeting tightens conditions by roughly the equivalent of an additional 25 basis point rate increase, with the equivalent for France closer to 50 basis points. Christine Lagarde has already noted that long-term rates have climbed markedly since the last meeting, a move that will slow growth and reduce price pressure by more than the bank projected in September. Barclays’ Rohan Khanna expects a clear emphasis on exactly that channel in Thursday’s communication.
Growth is not giving the hawks clean support either. October flash PMIs came in weaker than expected across the bloc: the euro area composite at 51.9 and Germany at 52.8, both still in expansion, but France at 48.4, in contraction, with business confidence at its weakest since April 2020. Brent crude has gained about 13 percent in October and the European gas benchmark about 25 percent, which keeps the energy leg of inflation alive into the winter.
The expected shape of the week is therefore a hold at 2.50 percent, data-dependent language, and the December 17 meeting, with new staff projections, left as the live one. What markets will trade is whether Lagarde describes the tightening delivered by bond yields as a substitute for a hike or as a fragmentation problem to be monitored. The first reading keeps December priced. The second, applied to France, would raise the question the bank does not want to answer in public: at what spread the Transmission Protection Instrument comes off the shelf.