ECB to hold rates as investors focus on French bonds, Lagarde's future
TLT•The ECB is widely expected to hold its deposit rate at 2.5% on Thursday while signaling another increase may come as soon as December. Investors are also watching French bond-market turmoil and speculation that President Christine Lagarde could leave before her term ends.
1. Rate decision expected
The European Central Bank is expected to keep its deposit rate at 2.5% on Thursday after raising rates twice since June. Policymakers may signal that another increase, potentially in December, remains likely as they seek to prevent an oil-price shock linked to the Iran conflict from feeding into prices and wages. Money markets are pricing roughly three further increases, which would take the deposit rate to 3.25%.
2. Lagarde faces questions
Lagarde is expected to face questions about her tenure amid speculation she may leave before France's spring presidential election, despite having a year left in her ECB term. The World Economic Forum could reportedly appoint her as its next chair as soon as November. Former central bank governors Klaas Knot and Pablo Hernandez de Cos are seen as frontrunners to succeed her.
3. French bonds in focus
Rising yields have pushed up borrowing costs, with concerns about France's debt burden and fiscal outlook driving French yields to some of their highest levels in a quarter-century. The premium investors demand to hold French debt over German bonds is larger than for any other euro zone country. An ECB intervention appears remote; possible tools include flexible reinvestment of proceeds from past bond purchases and its unused Transmission Protection Instrument.
