ECB: December Rate Hike Remains Baseline Expectation – UOB

The European Central Bank held key interest rates unchanged at its October meeting, but its policy signals still point to further tightening. UOB economist Lee Sue Ann analyzed that this pause does not mark the end of the tightening cycle, and a December rate hike remains the bank's baseline expectation. This assessment broadly aligns with the current mainstream market pricing direction—policymakers aim to hold off on action while retaining the option to continue combating inflation.

**Policy Logic Behind the Hawkish Pause**

Despite unchanged rates, the ECB's communication stance remains tilted hawkish. Energy price shocks and inflation transmission risks compel policymakers to remain vigilant against a rebound in prices. Meanwhile, rising yields on government bonds, exemplified by French debt, are substantively tightening financing conditions. This market-driven tightening partially substitutes for central bank rate hikes, allowing the Governing Council to adopt a wait-and-see stance without abandoning the option of proactive tightening.

**Support and Variables for a December Rate Hike**

Market reports indicate the ECB has implemented two rate hikes cumulatively since June, with the deposit rate currently at 2.5%. Rabobank analysts also anticipate December may bring the final hike of this cycle. However, the ultimate realization still depends on inflation trends and the duration of the energy shock over the coming weeks. Should financing conditions tighten further spontaneously, policymakers' hawkish rhetoric may become more restrained than before, but as of now, the door to a December rate hike remains open.