ECB to Keep Options Open in Pursuing Balanced Path — Market Talk

What happened

PIMCO's Konstantin Veit said the European Central Bank is staying on the middle path for monetary policy set out by President Christine Lagarde. PIMCO expects the ECB to keep its key rate unchanged at 2.5% this week and to hike in December.

Confirmed

Global impact / market context

Higher expected inflation in 2027 and 2028 means the ECB may keep rates higher for longer, which raises borrowing costs for companies and households. Markets price about 70 basis points of increases, that is hundredths of a percentage point, so a December hike is already partly reflected.

Analyst inference

Veit sees no sign inflation is becoming embedded, meaning it is not settling into wages and prices. Indirect effects are contained and second-round effects are not evident. Risks lean toward fewer hikes than priced, but uncertainty is exceptionally high.

Analyst inference

What to watch

1. The ECB's decision this week, which PIMCO expects to be a unanimous hold at 2.5%, will show whether policymakers stay on the middle path. Confirmed
2. Watch whether the ECB signals a December rate increase, as PIMCO expects, since that would guide companies' borrowing costs and capital spending plans. Proposed
3. Watch inflation data for signs of second-round effects, meaning wage and price increases feeding each other, because their absence underpins the case for fewer hikes. Analyst inference

Evidence

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