Morgan Stanley points to December for next ECB move with hold at 2.50% seen

Since a pause is already baked into market pricing, the single currency’s performance may hinge on whether Lagarde endorses the prospect of a December increase or preserves all options. If she stays vague, investors could trim some tightening expectations, dragging the euro lower. The Fed’s rate verdict, due one day earlier, will frame EUR/USD trading; a firm Fed tone accompanied by a hesitant ECB would hit the pair hardest. The key upside threat to eurozone inflation and to expected tightening is still the rally in oil caused by the conflict in the Middle East. French government bonds are sensitive to any hint that the ECB regards the recent rise in yields as a problem rather than helpful tightening, while Friday’s inflation flash estimates and GDP numbers might shift December pricing in either direction.

Earlier:

• ING expects BOJ to hold at 1.25% and hike twice in 2027
• Bank of Canada preview: economists split, with an 81% chance of a first hike in a year to 2.50%
• BOJ preview: Daiwa predicts a hold, but a 2% inflation forecast could leave the door open for December
• RBNZ preview: OCR expected to rise to 3% before the election as oil and the weak kiwi stoke inflation

The central bank is widely seen pausing this week, relying on elevated bond yields to tighten conditions, while December emerges as the likely meeting for the next rate increase.

Summary:

• The ECB announces its decision on Thursday, with a hold at 2.50% seen as all but certain following September’s increase
• Morgan Stanley analysts find no meaningful indirect or second-round effects from the energy shock so far, and argue higher long-term yields add extra tightening, so there is little urgency to move this week
• The bank regards December, when fresh data and updated staff projections will be available, as a more fitting time to adjust policy; a Reuters survey showed 64 out of 73 economists predicting a December hike
• ING contends that France’s fiscal crisis and elevated bond yields are already squeezing financial conditions; Commerzbank projects the deposit rate will climb to 2.75% in December and remain there throughout 2027, with the expected fall in oil prices and the drag from higher yields cited as reasons not to go beyond that
• Attention will centre on Lagarde’s press conference for hints about additional rate moves
• The week’s data include flash third-quarter eurozone GDP and October inflation readings from France, Germany and other countries on Friday, preceded by Germany’s Ifo index on Monday, GfK consumer confidence on Wednesday and eurozone sentiment surveys on Thursday

The ECB is broadly expected to announce a hold at the 2.50% deposit rate on Thursday, following September’s increase, as officials balance an unclear economic outlook against price growth still far above target.

In a research note, Morgan Stanley’s team said inflation has yet to show clear signs of indirect or second-round effects from the latest energy shock, and that the recent climb in long-term yields is already tightening policy further. These factors together mean there is no pressing need for another increase this week, the bank said; December, when policymakers will have fresh data and an updated set of staff projections, appears the more logical time to alter its policy stance.

Most analysts share that assessment. A Reuters poll carried out earlier this month found 70 of 73 economists predicting the ECB would hold in October, while 64 of 73 expected a further 25 basis point increase in December, a clear swing from the previous survey, when most considered the tightening phase over.

The recent surge in government bond yields, especially France’s, given concerns about its debt and budget, is likely to feature prominently in the ECB’s deliberations. ING economists contend that France’s fiscal crisis and elevated yields are already producing tighter financial conditions, making a pause highly probable and pushing any follow-up move to December. Commerzbank predicts only one increase, to 2.75%, in December, with rates then holding throughout 2027; the anticipated fall in oil prices and the restraining effect of higher yields are cited as reasons for stopping there.

Market watchers will scrutinise President Christine Lagarde’s post-decision briefing for signs of how likely further rate rises are in the months ahead. The decision is scheduled for 13:15 GMT (09:15 ET), and the press conference will follow at 13:45 GMT (09:45 ET).

The economic calendar is packed this week. Monday brings Germany’s Ifo business survey for October, Wednesday has the GfK consumer confidence gauge, and Thursday features eurozone business and consumer sentiment readings. Provisional eurozone GDP for the third quarter is due Friday, accompanied by flash October inflation prints from several countries, France and Germany among them, giving an early indication of whether the argument for a December move is building.