ECB to Hold Rates Next Week and Is on Course to Raise Them to 2.75% in December

A majority of economists surveyed by Bloomberg expect the European Central Bank to hold interest rates unchanged at its next meeting, then raise the deposit rate by 25 basis points in December to reach 2.75%, keeping it at that level until May 2028. Financial markets, by contrast, are pricing in three additional hikes over the coming year.

The bank raised rates twice in the wake of geopolitical developments in the Middle East, in June and September. Inflation in the eurozone rose to 3.8% last month, while economic activity proved more resilient than expected. Officials are seeking to prevent the energy shock from translating into permanent inflationary pressure in the economy.

Rabobank economist Bas van Geffen noted the absence of clear signs that energy inflation is feeding through into wages and the pricing of other goods, suggesting the bank is likely to prefer waiting until December rather than accelerating the pace of hikes. The survey found that more than two-thirds of economists believe the eurozone economy is performing worse than the September baseline scenario, against a backdrop of oil prices exceeding $110 per barrel. Dennis Shen of the Berlin School of Business and Innovation warned that a prolonged period of elevated inflation could trigger second-round effects on wages, prices, and inflation expectations.

Rising bond yields present an additional challenge for the bank. French benchmark bond yields reached 5% this week for the first time since 2002, raising concerns about a fresh debt crisis in the eurozone. Nevertheless, 70% of economists do not expect the ECB to intervene in markets, and around 90% consider activation of the Transmission Protection Instrument (TPI) — designed to curb unwarranted and disorderly market movements — to remain unlikely.

Some economists believe the bank may resort to more limited steps to ease pressure in bond markets, including more accommodative messaging on rate hikes or pausing quantitative tightening. ING Global Head of Macro Carsten Brzeski said the ECB may turn to communication measures to soften rate-hike expectations as a way of helping France.