Markets expect the European Central Bank to hold its key rate at 2.5% in October, while economists polled expect a quarter-point hike in December. French 10-year borrowing costs have topped 5%, and investors’ premium for holding French bonds over German bonds has risen to 170 basis points.
Markets widely expect the ECB to leave its key interest rate unchanged at 2.5% on Thursday, after rate increases in June and September. Economists polled expect a quarter-point hike in December. Policymakers are likely to maintain a data-dependent approach as September inflation stood at 3.8% and rising bond yields could weigh on growth.
Core inflation rose to 2.5% last month from 2.4%, while oil is up almost 80% this year and headline inflation is above the ECB’s 2% target. Markets price in at least two rate hikes by mid-2027; one strategist said further hikes in 2027 remain a risk if the Iran war escalates or energy prices face more pressure.
French 10-year borrowing costs have reached 24-year highs above 5%, and the premium over German bonds has climbed to 170 basis points from 92 basis points at the ECB’s previous meeting. ECB President Christine Lagarde says France should address its debt through fiscal consolidation. Lagarde may also face questions about succession; her term is scheduled to end next October.
