Europe | A pause with a clear direction

The ECB delivered the expected pause, but not without a debate. The Governing Council unanimously kept rates unchanged at 2.50%, after weighing whether another hike was warranted. Elevated uncertainty, broadly stable underlying inflation and tighter long-term financing conditions ultimately favoured holding rates.

Still, Lagarde left a fairly clear message for December. If the current assessment holds and no major surprises emerge, the “direction of travel is quite clear” i.e. a hike is the logical move. By then, the ECB will have updated projections and fresh inflation, GDP and wage data. Underlying inflation will be particularly important, alongside the broader outlook, risks and monetary policy transmission. As usual, decisions remain data-dependent and meeting by meeting, with no pre-set rate path.

On the macro front, the energy shock has intensified since September, with oil, fuel and gas prices, as well as refining margins, above the ECB's baseline. Yet underlying inflation remains broadly stable, with no additional second-round effects beyond those already incorporated into the projections. Lagarde expects easing energy pressures and higher rates to bring inflation back to target. Growth held up in Q3 as services recovered, despite weaker consumer confidence and higher borrowing costs. The ECB also acknowledged that rising long-term yields could weigh on growth and inflation, helping justify today's pause.

France also featured prominently in the Q&A. Lagarde showed little alarm over recent sovereign bond market developments, pointing to a global rise in long-term yields driven by inflation and rate expectations, as well as increased bond issuance. Still, she warned that highly indebted countries need to factor higher borrowing costs into their fiscal plans and comply with EU rules. She also recalled, in case it is necessary, that the ECB has tools to address unwarranted and disorderly movements threatening monetary policy transmission, subject to established conditions.

Lagarde's departure was another major topic. Announced ahead of the meeting, she will step down in February 2027, eight months before her mandate expires, seeking greater freedom to speak beyond monetary policy, without revealing her next plans.

Overall, the ECB chose to wait, but Lagarde's comments point towards another hike in December unless incoming data challenge the current assessment. Although higher long-term yields are already tightening financing conditions, the ECB placed greater emphasis on underlying inflation and the information still to come. Beyond December, further moves will depend on energy prices, underlying inflation and bond markets through March. We maintain our baseline of one final hike in December, followed by a long pause.