A pause leaves December open, but offers little support for the euro
The ECB held its deposit rate at 2.50% today, taking time to assess the impact of higher energy prices and tighter financing conditions.
On balance, we see another December hike as the more likely outcome, although limited evidence of additional second-round effects reduces the urgency to act. A material deterioration in the growth outlook could still justify extending the pause. For the euro, however, a largely priced increase offers limited additional support.
Having raised rates twice this year, the ECB faces competing pressures. Persistent energy inflation strengthens the case for further tightening, while rising bond yields, exacerbated by France’s fiscal and political tensions, are already increasing borrowing costs.
The Governing Council explicitly acknowledged that tighter financing conditions will weigh on both growth and inflation. This helps explain today’s pause: policymakers can assess the effects of the tightening already under way before deciding whether another increase is necessary.
Lagarde’s comments nevertheless suggest the ECB remains biased toward tightening. Policymakers discussed a hike, and her insistence that the direction of travel remains clear keeps December firmly in focus.
Her reassurance on second-round effects requires some qualification: the ECB sees no material additional pressures beyond those already incorporated in its projections, rather than no effects at all. Broadly stable underlying inflation and a limited wage response therefore justify patience, but do not remove the case for another increase if elevated energy costs threaten to prolong the inflation overshoot. December’s updated projections will be central to that judgement.
For the euro, the distinction between a likely hike and a supportive policy surprise matters.
With markets pricing around 22bp of December tightening after the announcement, a 25bp increase would offer little new impetus. A sharper slowdown could instead prompt investors to pare those expectations, leaving the currency exposed to weaker growth and lower expected rates. Broader acceleration in domestic price pressures could support the euro by prompting markets to price in further tightening beyond December. For now, however, we see limited scope for today’s message to drive a sustained EURUSD recovery.
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