Weekly update - A pause in an inflationary environment
The European Central Bank and the Federal Reserve left interest rates unchanged, but both institutions continue to maintain a cautious bias in the face of inflation that remains above their respective targets. Despite this pause, central bankers continue to emphasize their data-dependent approach and their commitment to bringing inflation sustainably back to target.
A pause driven by the need for more information rather than a change in direction. As expected, the Federal Reserve left its policy rate unchanged at 3.50%-3.75%. Alongside this decision, it announced a reduction in the number of monetary policy meetings in 2027. This pause in the tightening cycle reflects the willingness of FOMC members to gain greater visibility on the evolution of core inflation as well as on the extent of the tightening in financial conditions already generated by higher long-term interest rates. While Kevin Warsh once again remained highly cautious regarding the future path of rates during his press conference, the statement retained a clearly hawkish bias. Economic activity continues to be described as growing at a “strong pace”, job creation as evolving at a rate consistent with labour force growth, while “inflation remains elevated”. In addition, several Fed officials highlighted the continued strength of the US economy while acknowledging that inflation is not yet on a trajectory consistent with the 2% target. Against this backdrop, two voting members supported a rate hike at the October meeting. Data released yesterday, showing both GDP growth and PCE inflation above 3%, further confirm an environment characterised by robust economic activity and still-elevated inflationary pressures. Overall, these developments suggest that the Fed retains a bias toward further monetary tightening. A 25bp rate hike in December therefore remains the most likely scenario, and we continue to expect the tightening cycle to extend into 2027.
The ECB keeps rates unchanged amid persistent inflation. As widely expected, the European Central Bank (ECB) decided to leave its deposit rate unchanged at 2.5%, in what was one of the last monetary policy meetings chaired by Christine Lagarde ahead of the end of her term in February 2027. While both headline and core inflation remain above the 2% target, Christine Lagarde emphasized that long-term inflation expectations remain anchored around that level, while second-round effects from higher energy prices have not triggered a “material response” in wages. The ECB also noted that the tightening in financial conditions observed since September is likely to weigh on both growth and inflation over the coming quarters, supporting the current pause in the tightening cycle. Asked repeatedly about the situation in France, Christine Lagarde recalled that “countries with high levels of debt must take into account (…) that interest rates are higher and are likely to remain higher for some time”, a message suggesting that the ECB is not considering intervention in French bond markets at this stage. Finally, as with the Fed, the ECB stressed that it will remain attentive to inflationary pressures when determining the next steps of its tightening cycle. In an environment where (i) energy prices remain elevated due to tensions in the Middle East, keeping inflation high, and (ii) the euro area’s major economies continue to prove resilient, we expect the ECB to raise its policy rate again in December to 2.75%, with a terminal rate of 3% in 2027.