ECB caught in the French drama
The desk anticipates that the European Central Bank (ECB) will maintain its current interest rates during the upcoming meeting on October 29, largely influenced by the ongoing crisis in France. Per the full note from ING, the recent surge in bond yields linked to this crisis appears to have imposed a more contractionary monetary environment, which diminishes the necessity for the ECB to raise rates, despite persistent inflationary pressures. The recent dynamics indicate that market forces are effectively achieving a similar impact as a monetary policy adjustment, with German bond yields behaving as if a 25 to 50 basis point hike has already occurred in restricting economic growth. Additionally, the next significant meeting in December will bring new staff projections into play, which could guide future policy direction.
What the desk is arguing
The ECB is expected to hold interest rates steady during its October meeting, primarily due to external pressures stemming from the French economic crisis. Per the full note from ING, the impact of rising bond yields has effectively created a tight monetary environment that limits the ECB's need to intervene further.
Despite the ECB's recent hawkish tone, with rising headline inflation reported at 4.3% in September, the shift in market conditions signifies a departure from potential rate hikes in the near term. The desk acknowledges that German bond yields have increased significantly, aligning with the effects of a hypothetical rate hike, suggesting that the market has effectively taken on the role of the ECB.
Where it sits in our coverage
Our current target for EUR/USD is set at 1.075, with a range of 1.04 to 1.12. Notable firms within this range include: - jpmorgan with a Mar-26 target at 1.10 - bofa with a Mar-26 target at 1.04
The desk's expectation diverges slightly from bofa, which anticipates a more dovish outcome, but aligns closely with jpmorgan's slightly bullish projection, reflecting the spectrum of market sentiment heading into the ECB meeting.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01ECB likely to pause rate hikes amid French crisis.
- 02Rising bond yields are impacting monetary policy more than prior expectations.
- 03Next significant policy review and projections set for December meeting.
- 04Current inflation levels continue to challenge ECB's policy stance.
Market implications
Watch the fluctuations in EUR/USD closely, particularly around the 1.075 level, as this is the likely pivot point for reactions post-ECB meeting. Furthermore, monitor bond yield movements which could signal shifts in economic sentiment leading up to the December meeting.
Risks to this view
A resurgence in inflation data or unforeseen fiscal stability in France may prompt the ECB to reconsider its stance, injecting volatility into the euro and forcing a more aggressive policy response than the market currently anticipates.
Articles ECB caught in the French drama Published 03:51 Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The European Central Bank meeting on 29 October is not expected to result in an interest rate hike. Instead, the French crisis is increasingly eroding the need for additional rate hikes Carsten Brzeski With the surge in bond yields on the back of the crisis in France, we expect the ECB to remain on hold at next week's meeting 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. Or in other words, the bond market has taken over the ECB’s job. 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. In fact, there are three main parameters that, in our view, will determine the ECB’s path going forward: i) the length and intensity of the war in the Middle East. The longer oil prices remain elevated, the higher the probability of more rate hikes; ii) the knock-on effects of higher energy prices.
So far, there has hardly been any pass-through of higher energy prices in the rest of the economy. If this remains the case, the need for further rate hikes drops. If it doesn’t, the likelihood of new rate hikes goes up. iii) France.
Any solution to the current French fiscal woes could bring some relief to bond markets and allow the ECB to continue hiking rates. Without any solution, bond markets have taken over the ECB’s role, making rate hikes less likely (and less needed). Because it's France Even if France does not play a role in the ECB’s policy statement next week, it will be an important element at the press conference.
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