ECB can cool rate bets, but may not want to yet: Mike Dolan
TLT•The European Central Bank could signal that another rate rise this year is not certain, as higher borrowing costs and French debt stress tighten financial conditions. But it may avoid commenting directly on France ahead of its next meeting on December 17.
1. French debt complicates outlook
The ECB is weighing renewed energy-driven inflation against a near-doubling in six weeks of the French 10-year bond risk premium over Germany’s. The article says financial conditions have tightened, although gauges are mixed: the ECB’s September index rose sharply before leveling off, while other indexes initially showed easing.
2. ECB may avoid a signal
Stricter bank lending terms and a sharp fall in mortgage demand, particularly in France, could give the ECB grounds to indicate that another rate rise is not assured. The bank may nonetheless prefer to say little about France, with uncertainty around its budget, energy prices, the Iran war and US midterm elections before its December 17 meeting.
3. Intervention remains uncertain
The ECB has said that higher bond yields are a relevant factor in policy decisions, but has not addressed France’s debt problem directly. Deutsche Bank analysts see a high bar for deploying the ECB’s Transmission Protection Instrument, while arguing that rate hikes and use of the tool to stabilize France could be compatible.
