ECB on hold - hike on track for December

The ECB’s decision to leave rates unchanged in October was a pause before a likely December hike, while tighter financial conditions limit the prospect of a prolonged hiking cycle.

• The ECB kept its deposit rate at 2.50%, having last raised rates in September, and said underlying inflation was stable while wages showed no material response to higher energy prices.
• Energy-price risks remain tilted upwards, but the ECB judged that financing conditions had tightened sufficiently to weigh on inflation and reduce the need for immediate action.
• President Lagarde’s statement that, absent major developments, the “direction of travel” was clear prompted markets to price a December hike at close to 85% after the press conference.
• European sovereign yields had risen significantly, partly because of concerns about the fiscal outlook of France, the eurozone’s second-largest economy; the ECB gave no indication that it would intervene unless monetary-policy transmission was threatened.
• Lagarde is scheduled to leave the ECB on 7 February 2027, but the fund manager does not expect her earlier departure to materially alter the Governing Council’s policy approach.

Takeaway: The ECB remains committed to returning inflation to its 2% medium-term target and is likely to hike in December if incoming data confirm the need, while Royal London remains reasonably constructive on European sovereign bonds despite expected regional volatility.