ECB to keep rates steady as investors focus on French bonds, Lagarde's future
TLT•The ECB is expected to hold its deposit rate at 2.5% while signaling another increase may come as soon as December. Investors are also focused on French bond-market turmoil and speculation about President Christine Lagarde's future.
1. Rate decision in focus
The ECB is expected to keep interest rates on hold on Thursday, with its deposit rate at 2.5%, after raising rates twice since June. Policymakers are expected to signal that another increase, potentially in December, remains likely as energy costs fuel inflation. Money markets are pricing in three more ECB rate increases by the end of next year, which would take the deposit rate to 3.25%.
2. Lagarde's possible departure
Lagarde is expected to face questions about speculation that she could leave before France's spring presidential elections, despite having a year left in her ECB term. The World Economic Forum could appoint her as its next chair as soon as November, reportedly, and former central bank governors Klaas Knot and Pablo Hernandez de Cos are seen as frontrunners to replace her.
3. French bond-market strain
French borrowing costs have risen as investors grow uneasy about the country's debt burden and uncertain fiscal outlook. France is paying some of its highest yields in a quarter-century, and the premium over benchmark German bonds is larger than for any other euro zone country. An ECB indicator of sovereign market stress remains far from levels that may trigger intervention, while possible responses include flexible reinvestment of bond proceeds or the never-used Transmission Protection Instrument.
