El BCE pausará las alzas de tipos ante la tensión en la deuda

The European Central Bank (ECB) has decided to pause interest rate hikes amid increasing debt yields tension. This is what is expected at the upcoming monetary policy meeting in Frankfurt, where the cost of money is expected to remain at 2.5%, unchanged since September. The goal of raising interest rates is to tighten financing conditions to cool economic dynamism and ease inflation, which is still far from the 2% target set by the ECB.

However, persistent rises in bond yields, particularly in France, are also contributing to this tightening, provided it is not driven by stronger growth. Apart from concerns over market stability and financial uncertainty, the debt yield tension is automatically part of the central bank's workload. The market's tightening could mean we may not need as much of a rate adjustment as previously considered, according to Primoz Dolenc, the governor of the Bank of Slovenia.

Olli Rehn, governor of the Bank of Finland, echoed this sentiment, stating that harder financing conditions are already being observed and are weighing on growth, leading to disinflationary effects on expectations. With December in view, some members of the ECB Governing Council argue they can afford to wait until the monetary summit in December, when they will have fresh information from the macroeconomic projections review.

Joachim Nagel, president of the Bundesbank, emphasized the high uncertainty as a reason to opt for flexibility. Yannis Stournaras, governor of the Bank of Greece, insists that if there are doubts, no action should be taken until the next macroeconomic projections round. The ECB's expected pause in December will be a pause, not the end of the monetary tightening journey.

Most representatives of the decision-making body believe more work remains to restore price stability in the euro area. The high debt yields do not signal that our job is done, assures Pierre Wunsch, governor of the Bank of Bulgaria, echoing similar sentiments from Nagel, Imkus, and Martins Kazaks, governor of the Bank of Latvia, who suggest the 25 basis point rate hike in September is unlikely to be the last move.

The future of ECB President Christine Lagarde, who is reportedly considering a move to the World Economic Forum in Davos, is also under scrutiny. Various sources suggest that Lagarde's future announcement at the meeting cannot be postponed. Different expectations exist about when she might make her departure announcement, whether during a press question session or at the end of her speech.

While her departure is unlikely before the end of the year, Bruegel expects a clear announcement from Lagarde about her future to provide certainty about the dates. Leaders of the 27 EU countries will meet in December for an official European Council summit, where they are expected to discuss candidates for the central bank's top job following Isabel Schnabel's departure and the countdown to replace Philip Lane.