Key facts
- ECB expected to hold rates at 2.5% on Thursday.
- Inflation risks remain elevated due to French fiscal crisis and war.
- Markets price in at least two ECB rate hikes by mid-2027.
- French 10-year bond yields hit 24-year highs above 5%.
The European Central Bank faces a complex decision on Thursday as it grapples with persistent inflation risks stemming from geopolitical instability and a domestic fiscal crisis in France. While a pause in interest rate hikes is widely anticipated, policymakers must balance concerns over elevated inflation, exacerbated by oil prices above $100 a barrel, with the potential for rising government bond yields to dampen economic growth. The central bank will likely emphasize a data-dependent approach, stressing vigilance against second-round inflation effects from energy costs, even as core inflation shows a muted increase. The ECB is also monitoring the French bond selloff, which has pushed 10-year borrowing costs to 24-year highs, but President Christine Lagarde has indicated that France must address its debt issues through fiscal consolidation.