European Central Bank to raise rates in December before possible pause – Rabobank

Inflation will stay well above target, President Lagarde acknowledged, according to Rabobank's Senior Macro Strategist Bas van Geffen. Although the European Central Bank (ECB) considered raising rates, it kept policy unchanged. Lagarde signalled that a December increase was possible. However, the ECB's mixed messages and internal estimates of the drag from higher bond yields on growth and inflation suggest policymakers hope to pause thereafter, against a backdrop of leadership changes at the ECB.

Lagarde signals possible December rate increase

"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. Know more.)