ECB keeps rates unchanged but points to mounting inflation risk
TLT•The ECB held interest rates steady but said rising oil and gas prices pose upside risks to inflation and downside risks to growth. Markets and economists are betting on a December rate hike as inflation remains twice the bank’s 2% target.
1. Inflation risks rise
The European Central Bank left interest rates unchanged, saying energy prices had continued to rise and posed upside risks to inflation and downside risks to growth. It said underlying inflation remained broadly stable and wages had not shown a material response to higher prices, but the increased magnitude and duration of the energy shock were likely to lift inflation and undermine growth.
2. French borrowing costs
The ECB said tighter financing conditions were likely to weigh on inflation and growth. France is paying a 155 basis point premium over Germany to borrow for 10 years, while economists polled by Reuters expect one or two more rate hikes before the current tightening cycle ends.
3. Policy options
The ECB may face questions about a further rise in French borrowing costs. Possible responses include flexible reinvestment of proceeds from bonds bought through earlier asset-purchase programmes or activating its unused Transmission Protection Instrument.
