ECB confirms it stands in “good place” and commits to stay there

Highlights: The European Central Bank (ECB) left policy rates unchanged, seeing fewer downside risks to growth and steady risks to inflation. Policymakers committed they will continue to work on staying in the current “good place” as uncertainties in the external backdrop have reduced but remain. We expect the ECB to leave rates on hold across 2026 on the back of a small inflation undershoot and maintain our preference for EUR IG credit and Eurozone periphery equities over France and Switzerland.

• As anticipated, the ECB left the key policy rates on hold for a third consecutive meeting (deposit rate 2.0 per cent) as policymakers assessed the economic outlook remains broadly unchanged. We think the bar for further rate cuts is high and continue to expect rates to remain steady at current levels across next year. We believe the December meeting, when the ECB will release the new forecasts, including the ones for 2028, will be more crucial for the next steps on the ECB’s approach
• In a policy statement that was broadly unchanged, the policymakers highlighted the resilience of the economy despite the challenging global backdrop and elevated uncertainty. President Lagarde reiterated the policymakers’ conviction that the ECB stays in “good place” and committed that, since this is not a “fixed” place, policymakers will work to stay there
• While “the full impact of tariffs will only become visible over time,” policymakers expressed confidence that the monetary transmission “is functioning well,” and welcomed the EU and China trade deals with the US, saying they mitigated downside risks to the outlook
• EUR traded with volatility against G10 peers and weakened 0.3 per cent intraday versus USD, briefly touching to a three-month low of 1.155, but majorly driven from overnight developments in the October FOMC and month-end flows, rather than from the ECB messaging. Eurozone bonds similarly saw yields climbing a few basis points across maturities mirroring moves in US Treasuries. Equities trimmed earlier losses to -0.1 per cent, tracking incoming economic data and earnings
• We have a positive view on EUR amid narrowing rate differentials, a preference for EUR IG credit and periphery sovereign debt. We are mild overweight on Spain and Italy equities, over core Europe, reflecting a mild underweight in France and Switzerland