By Samuel Indyk and Naomi Rovnick
LONDON (Reuters) -Traders were confident in their view that the European Central Bank would keep rates on hold for now after it left policy unchanged, flagging a more resilient economy and appearing more relaxed about the growth outlook.
The ECB held the deposit rate at 2% for a third straight meeting on Thursday, having cut by 200 basis points since it began easing in June 2024, with President Christine Lagarde repeating it is in a “good place”.
All this left traders betting that the ECB will more likely hold interest rates, than cut again in this cycle. Traders now price in about 10 basis points of rate cuts by mid-2026, implying about a 40% chance of another quarter-point rate cut, down from about 50% on Monday.
Economic activity remains resilient despite risks from trade and geopolitical tensions. Inflation is also back under control after the post-COVID spike and is close to the ECB’s 2% target.
“They’re in a sweet spot, this Goldilocks scenario, from a monetary policy perspective,” said Brown Brothers Harriman senior markets strategist Elias Haddad.
“The inflation and economic backdrop in the euro zone argues for the ECB to continue standing pat here.”
NO MORE CUTS?
“The market is right, if there is a move in the next six months it’s likely to be a cut,” said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, adding that another cut was not his baseline forecast but a risk.
The euro rose slightly as traders trimmed their bets, but remained down 0.3% against the dollar at $1.1572. The dollar was broadly higher a day after Federal Reserve Chair Jerome Powell introduced some uncertainty over a December rate cut.
Germany’s rate-sensitive two-year yield was up 2 basis points at around 2%, benchmark 10-year Bund yields were also up 2 bps at 2.64%, while European stock markets were a touch lower on the day.
Those moves have been helped by expectations for more hawkish Fed policy, given U.S. influence on the global economy.
This week’s thawing in U.S.-China trade tensions and more robust euro zone growth data have also tempered rate cut bets.
DOWNSIDE RISKS TO GROWTH ABATE
The euro zone economy grew quicker than expected in the third quarter, official data showed, as buoyant consumption offset faltering exports and persistent struggles in Germany.
The growth outlook has remained stable and many economists expect it to improve next year due to Germany’s fiscal boost, as well as a lessening of trade tensions between the U.S. and major trading partners.
Lagarde told the press conference that recent trade deals meant downside risks to growth were abating, although acknowledged that major areas of uncertainty persisted.
Schroders Eurozone economist Irene Lauro said the improving growth outlook will keep the ECB on hold next year.
“Uncertainty on the external outlook is diminishing, so the risks to growth are probably more skewed to the upside,” Lauro said, adding: “We might start to think about the ECB hiking rates in 2027 with downside risks to growth dissipating”.
Germany’s spending boost was also expected to give a lift to inflation next year, meaning the window for the ECB to lower borrowing costs could be closing.
Euro zone inflation rose to 2.2% in September, above its target for the first time since April, as services prices rose and energy cost declines slowed.
ECB staff see inflation averaging 1.7% next year and staying below the target through mid-2027.
A flash estimate of October inflation for the bloc is due on Friday.
(Reporting by Samuel Indyk and Naomi Rovnick; Editing by Amanda Cooper, Dhara Ranasinghe and Alexander Smith)
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