December hike before a possible pause: European Central Bank – Rabobank

December could bring a rate increase from the European Central Bank (ECB). According to Rabobank's Senior Macro Strategist Bas van Geffen, President Lagarde signalled that possibility after acknowledging that inflation would stay well above target. The ECB considered raising rates but kept policy unchanged. Its mixed signals, alongside internal estimates of the drag from higher bond yields on growth and inflation, suggest policymakers hope to pause after that increase as the ECB undergoes leadership changes.

December rate increase signalled by Lagarde

"She said that the ECB debated whether a rate hike was appropriate already, but policymakers decided to leave policy unchanged yesterday. Lagarde hinted that the ECB is preparing a rate hike in December, but the ECB’s messaging wasn’t strictly hawkish."

"Even though energy prices now exceed the ECB’s baseline forecasts, President Lagarde noted that the Governing Council does not see greater risk of second-round effects than in September. This suggests that policymakers expect that the latest increase in energy prices will have a stronger negative impact on growth than the earlier energy, limiting passthrough to wages and prices."

"Indeed, Lagarde referred to the deteriorating sentiment amongst consumers. The ECB also expects that tighter financial conditions will weigh on the growth outlook. Shortly after the meeting, anonymous sources tactically leaked internal estimates that the recent rise in bond yields subtract around 1 percentage point from 2027-2028 growth and 90 basis points from inflation, compared to the September baseline."

"This mixed messaging from the ECB suggests that policymakers hope that they can take a pause after a December hike. That’s all, of course, subject to a highly uncertain outlook. But that’s not really Lagarde’s concern anymore: she will be leaving the ECB after the February policy meeting."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Learn more.)