ECB Watch: A pause with a French accent

The ECB is likely to leave rates unchanged on 29 October while acknowledging that France’s fiscal stress has tightened euro-area financial conditions without signalling immediate support for French bonds.

• The ECB raised its deposit rate by 25bp in September to 2.50%, and the absence of a move at back-to-back meetings is supported by limited subsequent evidence of second-round inflation effects.
• French sovereign stress has intensified: the 10-year OAT-Bund spread exceeded 160bp, versus roughly 90bp at the September meeting, while French 10-year yields moved above 5% and surpassed Italian and Greek yields.
• September headline inflation rose to 3.8% year on year as energy prices increased, but core inflation reached only 2.5% and indirect energy effects remained limited.
• Nordea expects the ECB to maintain a broadly similar message, with 25bp hikes in December and March 2027 taking the deposit rate to 3.00%; the December meeting is favoured because it includes new staff projections.
• France’s deficit is expected to reach around 5.4% of GDP this year, while uncertainty over the 2027 budget, next year’s elections and the fiscal platforms of leading candidates have driven a repricing of France-specific fiscal risk.

Takeaway: Investors should expect an unchanged October decision and potentially lower rate-hike expectations if the ECB highlights tighter financing conditions; a clearly disorderly sell-off spreading beyond France could instead delay the December hike.