BlackRock: ECB is sitting on the fence

By Roelof Salomons

ECB: Sitting on the fence

- The ECB still feels it’s in a “good place to hold and watch”, keeping policy rates unchanged today at 2%. It’s sitting on the fence — not particularly comfortable, but preferable to falling off on the wrong side. Inflation is still sticky, while growth is resilient enough. Notably, the ECB now considers the risks to growth to be more balanced, less skewed to the downside than before.

- ECB President Christine Lagarde repeated the meeting-by-meeting approach without pre-commitment. December was always the realistic opportunity for a cut, but only if inflation keeps falling and the balance of risks to growth tilts further to the downside. Another cut this year seems unlikely.

- Growth is steady, if unspectacular. The ECB’s new forecast raised 2025 GDP growth to around 1.2%. The forecasts for 2026 and 2027 changed marginally to 1.0% and 1.3% respectively. Surprisingly, policymakers see long-term inflation marginally down to 1.9%.

- Inflation is sticky as wage growth remains elevated. Headline inflation edged up to 2.1% in August, while core inflation held at 2.3%. Yet forward-looking indicators point to cooling wage growth ahead and the ECB’s forecasts see inflation coming in under 2% in 2026 and 2027. The euro has firmed 3% on a trade-weighted basis since June, adding some disinflationary pressure.

- Markets are still priced for the ECB to stay at 2% into year-end and the hurdle for another cut is quite high. We do not expect the political turmoil in France to impact ECB decisions. We think the risk premium on French government bonds (OATs) will stay elevated. Yet we would argue that concerns about expansionary fiscal policy and mounting debt burdens are a global story and key market drivers over recent months.

- The ECB’s fence-sitting leaves few immediate catalysts to change investment views. We see fiscal concerns pushing long-term global bond yields higher over time. We keep our relative preference for European long-term bonds and credit over developed market peers. European equities benefit from fiscal easing and relative stability, but their upside is capped by tariffs, political uncertainty and Europe’s need for reform.