ECB Rates: Economists vs. Market – Euro in Focus
Economists expect the ECB's last hike in December, traders three more. France's 5.14% yield sharpens the conflict.
Key Takeaways
- Economists expect the ECB's last hike in December, to 2.75 percent.
- Traders price in three hikes within a year, which is considerably more.
- France's 10-year yield above 5 percent narrows the central bank's room to maneuver.
How high will euro-area interest rates go? Analysts and traders are giving two very different answers right now, and Paris makes the math harder. According to our momentum snapshot, EUR/USD sits at 1.1197.
Paris Is Breathing Down the ECB's Neck
Let's start where the pressure is greatest: French government bonds. Ten-year paper briefly yielded 5.14 percent on Thursday, the highest since the summer of 2002. In August the level was still around 4 percent. Finanzmarktwelt puts the gap to German Bunds (Germany's benchmark government bonds) at 1.75 percentage points, and for a moment France paid more than the U.S. at 5.04 percent.
That hits the ECB at an awkward moment. Oil above $110 has pushed September inflation to 3.8 percent, almost double the 2 percent target. Two hikes since the Iran war began, in June and September, have not broken it. But every further tightening also makes debt more expensive for heavily indebted countries, and France is first in line.
Two Forecasts That Don't Fit Together
For such cases the ECB has a tool, the Transmission Protection Instrument (TPI), meant to support bonds of countries whose yields spiral out of control. In a Bloomberg survey conducted October 16 to 21, which Finanzmarktwelt picks up, about 90 percent of economists do not expect it to be used.
Instead they expect restraint. By their forecast, the deposit rate rises by a quarter point to 2.75 percent in December, after which nothing happens until May 2028. The futures market disagrees. It has room for three hikes within twelve months, with the December step included. Who is right will determine the euro's rate differential against the dollar.
Rabobank economist Bas van Geffen offers one argument for patience. Energy price increases have not yet spilled over into wages and other prices, he says, so acting in December is enough. ING chief economist Carsten Brzeski considers the ECB's role toward France limited anyway: the country has to help itself. The only tool left, he says, is to dampen market expectations with softer signals.
Risks Hidden in the Survey
Three quarters of respondents consider higher-than-expected inflation in 2027 possible, and 57 percent see downside risks to growth. Having both at once is awkward: the central bank has to curb prices without choking the economy.
A look at Germany shows how fragile things are. The purchasing managers' index fell to 52.8 points in October, a two-month low, against 53.3 expected and 53.8 the month before. Manufacturing rose to 54.2 points while services fell to 51.7 points, as Finanzmarktwelt summarizes.
What momentum says
Momentum signals mostly weakness for EUR/USD: the 1h, 4h and 1W timeframes are bearish, only the daily chart (1D) is neutral. The price at the time of the snapshot was 1.1197.
Scenarios
If the ECB announces a longer pause at 2.75 percent in December, expectations of further hikes fade and the euro loses a support. If inflation holds up instead, the market could be proven right with three steps, and France's yields above 5 percent move even further into focus. Both point to swings around the 1.1197 mark.