ECB should maintain director fees and postpone rise to December

O European Central Bank (ECB) is expected to maintain the steering rates on Thursday, according to most analysts, which continues to anticipate an increase in December, after known new forecasts of growth and inflation.

Steering interest rates should remain unchanged, according to expectations, with the deposit rate remaining at 2.5%, after two increases made this year. The energy shock related to the conflict in the Middle East continues to occupy the minds, but the few economic data published since September do not seem to be enough to change the course of the ECB.

In this context, attention must be paid to France, which has become the weakest link in the euro area, but without causing an immediate monetary response, according to analysts.

In an environment of polarisation of French society and difficulties in implementing reforms for the recovery of public finances, the ten-year French debt yield exceeded last week the 5% barrier, for the first time since 2002.

And the risk premium from France, the 10-year interest differential from Germany with the same deadline, in turn, exceeded 170 basis points, a maximum since autumn 2011.

Investors are concerned about the French debt and deficit, among the highest in Europe, the heated debate around the 2027 budget and the uncertainties associated with the presidential elections.

A political context that has become even more tense in recent days with the strong social discontent and demonstrations marked by violence and theft.

But, contrary to general expectations, Moody’s abstained on Friday from any classification action on French debt, keeping the assessment in Aa3 with a negative outlook.

The rise in French loan rates poses a potential risk for the euro area to extend to other countries, but ECB intervention remains unlikely at the moment.

Markets are wondering when Frankfurt could activate the Transmission Protection Instrument (TPI), created in 2022 but never used, which allows in theory massive purchases of state bonds to contain tensions in markets.

“ The means to contain the rise in French debt interest rates must be found first in France,” said Christine Lagarde recently.

The ECB’s decision will take place after the U.S. Federal Reserve (Fed) meeting, which is also expected to maintain the fees after the September increase.

Annual inflation in the euro area reached 3.8% in September, the highest level in three years, but inflation excluding energy prices remained virtually unchanged, a sign that the rise in fuel prices so far had almost no secondary repercussions.

“The ECB does not need to rush. It began to tighten monetary policy earlier in this cycle, there are still few signs of side effects of rising energy prices and the strong rise in bond interest rates is already restricting financial conditions. This gives the ECB room for a break in October without changing the course of monetary policy,” says Michael Krautzberger, Director of Global Investment (CIO) of Public Markets, Allianz Global Investors (AllianzGI).

AllianzGI’s manager considers that “outcome is a pause, not a change of direction” and says that “the ECB can afford to be patient, but cannot yet declare victory over inflation”.

The next meeting of the ECB will take place on 16 and 17 December in Frankfurt.