European Central Bank: Rising bond yields favor an October hold – ING

ING’s Carsten Brzeski expects the European Central Bank to keep policy rates unchanged at the 29 October meeting, as the French fiscal crisis and higher bond yields are already tightening financial conditions. He argues that the ECB will likely delay any rate decision to December, when new projections arrive, and may lean more dovish while monitoring Oil prices, energy pass-through and French fiscal developments.

Rates on hold as bonds tighten policy

"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."