Rabobank: ECB likely to lift rates once more in December

Lagarde told journalists the Governing Council had considered raising borrowing costs at this gathering but ultimately opted to leave policy on hold. Van Geffen interprets her remarks as laying the groundwork for an increase at the December meeting, even though the broader tone of her press conference stopped short of sounding firmly hawkish.

Energy costs have climbed past the levels built into the ECB’s own forecasts, yet Lagarde indicated the Governing Council does not view the risk of wages and prices picking up second-round momentum as any greater than it judged in September. Van Geffen takes this to mean the central bank believes the newest jump in energy prices will dent economic activity more than it lifts inflation, a view reinforced by Lagarde’s reference to souring consumer confidence.

Policymakers also acknowledged that stricter borrowing conditions are likely to drag on economic momentum going forward. Soon after officials wrapped up the meeting, people familiar with internal ECB modelling disclosed that the recent run-up in bond yields could strip roughly 1 percentage point from growth over 2027-2028 and trim inflation by 90 basis points relative to the September forecasts.

Taken together, van Geffen argues these signals point to the ECB wanting to squeeze in a final rate increase in December before stepping back, though he cautioned the path ahead remains deeply uncertain. He added that Lagarde is due to exit the ECB once the February policy meeting concludes, meaning she will have less personal stake in how that uncertainty ultimately resolves.

Should a December ECB rate hike materialise, it would likely reshape positioning in the euro and euro-area sovereign bonds, including German Bunds, while any subsequent pause could limit further swings in EUR/USD and in European equity benchmarks sensitive to the interest-rate trajectory.

Source: FXStreet