French debt turmoil looms over ECB’s Thursday decision

The European Central Bank is widely expected to leave its benchmark rate at 2.5% when it meets on Thursday, Oct. 29. Investors are paying less attention to the rate call itself than to how policymakers respond to France's deepening fiscal and political crisis, AFP reported.afp.com

The ECB has already raised rates twice this year. It is trying to contain inflation driven by the Iran war energy shock while also supporting a slowing economy. Euro-zone inflation climbed to a three-year high of 3.8% in September, though core inflation barely changed.afp.com

No lifeline for France

Last week, French bond yields hit their highest level since 2002 amid a standoff over next year's budget. The selloff also followed protests that turned into the worst street violence in years. The premium investors demand to hold 10-year French debt instead of German debt has reached levels last seen during Europe's debt crisis, Bloomberg reported.finance.yahoo.com+1

Some investors have speculated that the ECB could use its Transmission Protection Instrument for the first time. Most observers, however, say France does not meet the tool's strict criteria. The instrument is meant to counter "unwarranted" market moves, not problems caused by fiscal policy. ECB President Christine Lagarde said earlier this month that "the primary and first solution lies at home in France," and the Bank of France governor said "conditions are not met" for intervention. Andrew Kenningham of Capital Economics expects "no lifeline for France" this week.afp.com

ING's Carsten Brzeski said France's turmoil has "actually lowered chances of another rate hike," because "bond markets have taken over the ECB's task" by tightening financing conditions.afp.com

Growth losing momentum

A Bloomberg poll suggests euro-zone growth slowed to 0.2% in the third quarter, down from 0.6% in the second quarter, which an Irish surge had boosted. The official figures are due Friday, Oct. 30. Economists expect the ECB to raise its deposit rate a third and final time in December rather than this week. France's private sector shrank in October. Carrefour warned that nationwide looting will weigh heavily on its results, and the Bundesbank thinks Germany likely stagnated in the third quarter.finance.yahoo.com

Bank of America expects policymakers to sound less hawkish than in September. Its economists said the ECB "will need to focus more on the growth consequences of current developments than it has in the recent past".finance.yahoo.com

The ECB announces its decision one day after the Federal Reserve. The Fed is also expected to hold after raising rates in September. Lagarde may also face questions about speculation that she could step down before her term ends in October 2027, possibly to lead the World Economic Forum.afp.com