ECB Expected to Hold Rates at 2.5% as French Turmoil and Energy Costs Cloud Outlook

The European Central Bank is expected to leave its key interest rate unchanged at 2.5% at its Thursday meeting, a pause widely anticipated after hikes in June and September, with economists polled by Reuters forecasting a quarter-point increase in December. Policymakers must weigh inflation of 3.8% in September against rising government bond yields and political upheaval in France, where 10-year borrowing costs hit 24-year highs above 5% and the spread over German bunds widened to 170 basis points from 92 bps at the prior meeting. Core inflation rose modestly to 2.5% from 2.4%, suggesting energy costs have yet to trigger second-round effects. With oil up nearly 80% this year amid an Iran war, the ECB is likely to stress vigilance and retain a data-dependent stance. Analysts said the ECB is unlikely to deploy its Transmission Protection Instrument for France, which Lagarde has said should pursue fiscal consolidation itself. Succession questions also loom, with Klaas Knot and Pablo Hernandez de Cos seen as frontrunners to replace Lagarde.