European Central Bank: Do rising bond yields strengthen the case for an October hold? – ING

Financial conditions are already tightening as France’s fiscal crisis drives bond yields higher, leading ING’s Carsten Brzeski to expect unchanged European Central Bank policy rates at the 29 October meeting. In his view, the ECB is likely to defer any rate decision until December, when fresh projections become available. Its tone may also turn more dovish as it tracks oil prices, the pass-through of energy costs and developments in France’s fiscal situation.

Will higher bond yields keep ECB rates on hold?

"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."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)