ECB to Hold Rates Next Week, Poised to Raise to 2.75% in December

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

The bank raised rates twice following geopolitical developments in the Middle East, in June and September. Inflation in the eurozone climbed to 3.8% last month, while economic activity proved more resilient than expected. Officials are seeking to prevent an energy shock from transforming into sustained inflationary pressures in the economy.

Rabobank economist Bas van Hifven pointed to the absence of clear signs that energy inflation is passing through to wages and 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 September's baseline scenario, with oil prices exceeding $110 per barrel. Dennis Shen from the Berlin School of International Business warned that persistently high inflation over an extended period could lead to second-round effects on wages, prices, and inflation expectations.

High 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 new debt crisis in the eurozone. However, 70% of economists do not expect ECB intervention in markets, while around 90% believe that activating the Transmission Protection Instrument (TPI), designed to curb unjustified and disorderly market movements, remains unlikely.

Some economists see the bank potentially resorting to more limited steps to ease pressures in bond markets, including issuing more dovish guidance on rate hikes or halting quantitative tightening. Carsten Brzeski, chief global macro economist at ING, said the European Central Bank could resort to communication measures to soften rate hike expectations with a view to helping France.