French spread has almost doubled since the ECB last met

Reuters' preview, published on 23 October, says the ECB is set to hold rates at 2.50% on 29 October after hikes in June and September. Economists polled by Reuters expect the next quarter-point increase in December. Danske Bank dropped its call for an October hike on 20 October; it now sees a peak of 2.75% after a 25-basis-point move in December, and considers the 75 basis points of tightening priced by the market excessive. A Yardeni Research note of 24 October says the market assigns a 75% probability to a December hike.

Sources differ on the inflation print: Reuters gives September headline inflation as 3.8%, Danske as 3.7%. Core inflation, excluding food and fuel, rose from 2.4% to 2.5%. Reuters says oil is up about 80% this year, yet officials including chief economist Philip Lane are not yet greatly worried about energy costs feeding into wages. The market prices at least 2 hikes by mid-2027.

France is the real test. The French 10-year yield has broken above 5%, a 24-year high. The ECB is not expected on 29 October to activate the TPI, the tool that lets it buy the bonds of a member suffering unwarranted and disorderly tightening. Lagarde wants France to repair its debt through fiscal consolidation. Berenberg's Holger Schmieding argues that if the French crisis damages growth the ECB may hold back on hikes, and that any TPI support would benefit other members more than France.

The institutional calendar is tightening too. Reuters reports that Lagarde could be chosen to head the World Economic Forum as early as November; her term ends in October 2027. An early exit would allow a successor to be picked before France's presidential election in spring 2027, with Klaas Knot and Pablo Hernández de Cos the 2 leading candidates. One seat on the six-member Executive Board is already vacant after Isabel Schnabel's resignation, and Lane leaves in May.