Vanguard: ECB set to pause, while keeping the door open to further tightening

October 27, 2026

We expect the ECB to leave the deposit facility rate unchanged at 2.50% at Thursday’s meeting, broadly in line with market pricing. Growth remains relatively resilient, but softer activity and tighter financial conditions give the ECB room to pause, while higher energy prices keep inflation risks to the upside. We therefore see October as a pause rather than the end of the cycle, with two further 25bp hikes taking the policy rate to 3.0% by end-2027.

Key Takeaways

• The ECB is likely to leave rates unchanged in October. Recent communication from Governing Council members has been relatively balanced, with policymakers stressing that a measured approach remains appropriate.
• Growth has remained resilient, although momentum has softened somewhat. Activity has held up better than expected given the energy shock and broader uncertainty. However, recent survey data have become more mixed, with the October PMIs pointing to some loss of momentum, particularly in France.
• Tighter financial conditions strengthen the case for a pause and downside risks are building. Long-term yields have risen materially and sovereign spreads have widened, particularly in France, tightening financial conditions across the euro area. This is likely to weigh on demand and could substitute for some additional monetary tightening. Our analysis suggests that a one-standard-deviation tightening shock to financial conditions lowers the level of euro area real GDP by around 0.4–0.5%, with the effect gradually reversing thereafter. This reinforces our view that risks around our current 1.3% growth forecast for 2027 are increasingly tilted to the downside, particularly if financial conditions tighten further.
• Higher energy and food prices remain the main upside risk to inflation, but second-round effects remain limited. Energy prices have risen substantially since the September meeting, current futures curves point to a path above the ECB’s adverse scenario. The shock also extends beyond crude oil and gas, with tight refining capacity keeping refined-product prices elevated and low European gas storage increasing vulnerability to further supply disruptions. Higher energy and agricultural commodity prices are also feeding through into food inflation, which we expect to rise towards 4% in 2027. Despite these pressures, there is still limited evidence of broader second-round effects.
• France is likely to feature prominently, but we do not expect the ECB to signal intervention. Political and fiscal uncertainty in France has contributed to wider sovereign spreads, but current market stress does not appear sufficient to prompt ECB intervention. Lagarde is likely to reiterate that addressing fiscal imbalances is primarily the responsibility of national governments, while stressing that the ECB has tools available should market moves become disorderly or threaten monetary-policy transmission.
• Communication is likely to remain balanced and focused on optionality. We expect the ECB to maintain its assessment of upside risks to inflation and downside risks to growth, while reiterating that future decisions will remain data dependent and taken meeting by meeting. We would therefore expect little explicit guidance on the timing or extent of further tightening.
• Our view: Given our forecast for persistent above-target inflation, we expect another 25bp hike by December and a further 25bp hike in 2027, taking the policy rate to 3.0% by end-2027. The lack of significant second-round effects and tighter financial conditions argue for a gradual approach, but persistent inflation risks mean we do not think the tightening cycle is over.