Frankfurt:The European Central Bank (ECB) convenes on Thursday with a focus on France's worsening public finances, raising questions about potential support for the eurozone's second-largest economy.
According to Bangladesh Sangbad Sangstha, the ECB is anticipated to maintain current interest rates, having increased them twice earlier this year. The bank is navigating the challenge of controlling inflation, exacerbated by the Iran war energy shock, while also supporting the eurozone's economy.
Recently, French bond yields reached their highest levels since 2002 due to a budgetary standoff for the upcoming year. Additionally, street protests in France, partly fueled by demands for increased public service spending, have escalated into severe violence, prompting speculation about the ECB's crisis management strategies.
The ECB is considering the potential use of the Transmission Protection Instrument (TPI), a crisis-fighting tool designed to counteract movements in sovereign debt markets. However, stringent criteria for its activation may not be met by France's current situation. Michel Martinez, an economist at Societe Generale CIB, cautioned that deploying the TPI could involve the ECB in national politics, potentially compromising its independence ahead of presidential elections in France.
ECB President Christine Lagarde, a former French finance minister, has expressed skepticism regarding the deployment of the TPI. She emphasized that France should address its fiscal policies domestically to mitigate rising yields. Investors are expected to scrutinize Lagarde's comments during a press conference for indications on how borrowing costs might influence future ECB rate decisions.
Higher government borrowing costs typically lead to increased household borrowing costs, which might reduce the necessity for the ECB to raise rates. Analysts at UniCredit noted that if financial conditions tighten broadly, this could decrease the need for additional rate hikes.
Economists largely anticipate that the ECB's final rate increase of the current cycle will occur in December, informed by new growth and inflation forecasts. Despite fears, the eurozone economy has shown resilience following the onset of the Iran war, with inflation reaching a three-year high of 3.8 percent in September, surpassing the ECB's target of two percent.