Key facts
- ECB expected to hold rates at 2.5% on Thursday.
- Inflation risks remain elevated due to the Iran war and French political instability.
- Core inflation stood at 2.5% in September.
- French 10-year bond yields hit 24-year highs above 5%.
The European Central Bank convenes on Thursday with a complex economic landscape, marked by geopolitical tensions and domestic political instability in France. The ongoing conflict in Iran has pushed oil prices above $100 a barrel, contributing to elevated inflation risks. Policymakers are expected to maintain the key interest rate at 2.5%, a decision anticipated by economists polled by Reuters, who also foresee a potential quarter-point hike in December. Core inflation, excluding volatile food and fuel prices, edged up to 2.5% in September, indicating that high energy costs have not yet triggered widespread second-round effects. However, the ECB will likely emphasize vigilance given the persistent inflation pressures and the potential for further energy price shocks. The central bank is also closely monitoring the situation in France, where 10-year borrowing costs have surged to 24-year highs above 5%, and the spread between French and German bonds has widened significantly. While the ECB has tools like the Transmission Protection Instrument to address disorderly market conditions, President Christine Lagarde has indicated that France should manage its debt through fiscal consolidation. Concerns about contagion effects to more fiscally sound countries could prompt ECB intervention, but likely not for France itself.