Global Market: ECB may pause rate hikes after December amid growth risks

European Central Bank (ECB) policymakers expect to raise interest rates in December to tackle rising energy-led inflation before pausing further monetary tightening, as higher bond yields are expected to weigh on economic growth and inflation, Reuters reported, citing three sources familiar with the discussions.

The ECB kept interest rates unchanged at its latest policy meeting on Thursday, in a widely anticipated decision. However, President Christine Lagarde signalled the possibility of another rate increase in December, warning that elevated and rising energy costs were adding to inflationary pressures and risks.

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Three policymakers told Reuters that a rate hike at the December 17 meeting was almost certain, unless energy prices witness a sharp and unexpected decline. Such a move would take the ECB's deposit facility rate to 2.75%.

However, policymakers expect the central bank to pause its rate-tightening cycle after the December increase, as the impact of rising bond yields is likely to dampen economic activity and price pressures over the coming years.

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ECB estimates circulated ahead of Thursday's meeting indicated that the recent increase in bond yields could reduce cumulative economic growth by 100 basis points and inflation by 90 basis points in 2027-28, compared with the central bank's September baseline projections.

The estimates suggest that tighter financial conditions could partly offset the inflationary impact of higher energy prices, potentially reducing the need for further monetary tightening beyond December.

The ECB is therefore expected to balance persistent energy-driven inflation risks against the growing impact of tighter financial conditions on the euro zone economy.