ECB flags December hike but sees yield rise hitting growth
TLT•The ECB held rates at 2.5% and signalled a December hike as energy costs fuel inflation risks. ECB estimates showed the latest bond-yield rise would lower growth by 100 basis points and inflation by 90 basis points in 2027-28 versus its September baseline.
1. December rate outlook
The European Central Bank left rates unchanged at 2.5% on Thursday but signalled that a hike in December was likely as higher oil and gas prices raised inflation risks. President Christine Lagarde said policymakers had discussed a hike at the meeting and would use incoming data to assess whether it was warranted. Sources told Reuters that a hike on December 17 was all but certain, with policymakers expected to pause afterward.
2. Yields weigh on outlook
ECB estimates circulated before the meeting showed that the latest rise in bond yields would lower economic growth by a cumulative 100 basis points and inflation by 90 basis points in 2027-28 compared with the September baseline projection. Lagarde said bond yields were likely to remain high for heavily indebted euro zone members and needed to be considered when setting rates.
3. French borrowing costs
France was paying a 155 basis point premium over Germany to borrow for 10 years, a decades-high level. Lagarde said governments must comply with EU fiscal rules to qualify for ECB help under its Transmission Protection Instrument, and said the bank had tools to respond to unwarranted and disorderly market movements. The decision came hours after Lagarde announced she would step down early.
