Ecb caught in the french drama

Key arguments

• Bond-market tightening driven by France roughly substitutes for a 25bp ECB hike in Germany and close to 50bp in France, so the bond market has taken over the ECB's job.
• The ECB will probably hold on 29 October and defer any hike to December, when new staff projections and clearer energy pass-through evidence are available.
• Because activating the Transmission Protection Instrument would look like monetary financing of a non-compliant France, the ECB is expected to use a three-pronged response: dovish rates, a pause in quantitative tightening with flexible reinvestment, and TPI only if contagion intensifies.

Corresponding source evidence

1. Instead, the French crisis is increasingly eroding the need for additional rate hikes With the surge in bond yields on the back of the crisis in France, we expect the ECB to remain on hold at next week's meeting Back in September, the ECB surprised markets with a more hawkish message, at least between the lines. · next week
2. With headline inflation higher for longer and core inflation expected to increase in 2027, the stage seemed set for at least one more rate hike at the December meeting. · 2027
3. Last but not least, should contagion in eurozone bond markets intensify, we expect the3.