The ECB kept interest rates unchanged at 2% and reiterated that policy was in a “good place” as economic risks recede and the eurozone shows continued resilience in the face of uncertainty.
Eurozone borrowing costs rose last Friday after traders digested stronger-than-expected purchasing manager indices.
The German ten-year yield on German government bonds, the benchmark for the euro area, rose by one basis point (bp) to 2.65%. They expected a weekly increase of 2 bps, after rising 4.5 bps the week before.
“We tend to agree with the ruling council’s majority view that the risk to the medium-term inflation outlook remains broadly balanced,” said Konstantin Veit, portfolio manager at PIMCO.
“The ECB’s reaction function is not focused on refining policy, and we continue to expect a prolonged period of inaction on policy rates,” he added. Traders cut their bets on future ECB rate cuts early after the Fed meeting on Thursday, with market positioning remaining steady following the ECB’s policy statement and comments from its president, Christine Lagarde. Money markets had priced in a 45% chance of a 25 basis point ECB rate cut in September, down from around 70% last Friday. PMI data has been released. The policy rate will be 1.90% in December 2026, compared to the current 2%.
Government bond yields were also set to post a monthly decline of 6.5 basis points as rising concerns over the economic fallout from US-China trade tensions revived bets on another ECB rate cut and drove down borrowing costs earlier this month.
US President Donald Trump said on Thursday he had agreed with President Xi Jinping to cut tariffs on China in exchange for Beijing’s crackdown on the illegal fentanyl trade, resuming US soybean purchases and keeping rare earth exports going.
“On US China, a broad agreement is positive in the near term,” said Mohit Kumar, an economist at Jefferies.
“But our view remains that both the US and China would seek to reduce dependence on each other in the medium term,” he added.
The German two-year yield, which is more sensitive to expectations regarding the ECB’s policy rate outlook, remained roughly unchanged at 1.99%.
Eurozone inflation slowed slightly in October and continued to hover around the ECB’s 2% target.
The yield gap between safe-haven Bunds and 10-year French government bonds – a market measure of the risk premium investors demand to hold French government bonds – was 77.50 basis points. The spread stood at 87.96 basis points in early October, the widest since January, driven by investor concerns about France’s fiscal path. (Writing by Stefano Rebaudo; editing by Thomas Derpinghaus and Andrew Heavens)
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