ECB set to hold at 2.5% Oct. 29; December hike expected

The European Central Bank is expected to leave its key interest rate unchanged at 2.5 per cent when its Governing Council meets Thursday, Oct. 29, with most economists forecasting another quarter-point increase in December, according to Reuters and RSM.

The hold would follow rate increases in June and September and comes with euro-area inflation at 3.8 per cent, almost double the central bank’s 2 per cent target, Eurostat said in its final September estimate on Oct. 16, 2026.

A Reuters poll of 73 economists taken Oct. 5 to 8 found all but three expect no change this week. Sixty-four of the 73 expect the ECB to raise its deposit rate to 2.75 per cent in December, a reversal from the previous month’s poll, in which more than 90 per cent expected a hold. Of 70 economists who gave a peak rate, 40 see 2.75 per cent and 24 see 3 per cent, up from two a month earlier. Reuters reported the results on Oct. 8.

Jack Wellard, a research economist at RSM UK, wrote Monday that the ECB is likely to hold and that RSM expects a December hike that would leave policy modestly restrictive. He puts the neutral rate between 2 per cent and 2.5 per cent. Beyond December, he said, the path depends largely on energy markets, and policymakers may pause if tensions ease and prices moderate.

Energy is the main driver. Eurostat’s figures show energy prices rose 18.9 per cent from a year earlier in September and contributed about 1.7 percentage points of the 3.8 per cent headline rate. Core inflation, which excludes energy, food, alcohol and tobacco, was 2.5 per cent, up from 2.4 per cent in August. Wellard noted that core inflation is only 0.1 percentage point above its level before the Iran conflict began. Our earlier report on the September inflation figures has the country breakdown.

ECB President Christine Lagarde has argued for caution. In an International Monetary Fund speech, quoted by RSM, she said “wages have so far shown no material response to the energy shock” and that “a measured response remains appropriate to keep inflation in check.” Latvia’s central bank governor, Mārtiņš Kazāks, also quoted by RSM, said “there isn’t any immediate need to rush on rates.”

Bond markets add a second pressure. Reuters reported that the yield on France’s 10-year government bond rose above 5 per cent, a 24-year high, and that the gap between French and German 10-year yields widened to 167 basis points from 92 basis points at the ECB’s previous meeting. The same report said the ECB is not expected to use its Transmission Protection Instrument, its tool for countering disorderly bond-market moves, immediately. RSM, using a different measure, put the French-German spread at about 175 basis points. Earlier this month we reported on France’s rising borrowing costs.

The ECB’s decision lands as other central banks move. The Bank of Canada announces its own rate decision on Oct. 28, a day earlier, as we reported in our look at Bank of Canada rate hike odds. Oil is the common thread: Brent crude settled at a six-month high in recent trading.

For Canadians, the euro area is a major partner under the Canada-EU Comprehensive Economic and Trade Agreement. Higher European borrowing costs and prices can affect demand for Canadian exports and the cost of European goods, and they raise the cost of living for Canadians travelling in the euro area. Travel advisories are posted at travel.gc.ca.

The ECB announces its decision Thursday, followed by a news conference with Lagarde. Eurostat’s flash estimate of October inflation is due Nov. 4, and the ECB’s next policy meeting is in December.

Via Reuters, RSM and Eurostat.

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