ECB meets as French debt woes mount

30/10/2026 06:51 AST

The European Central Bank meets on Thursday with France's deteriorating public finances in focus as questions swirl over how it might support the euro-zone's second-largest economy. Most expect the ECB to keep interest rates on hold for now, having already hiked them twice this year, as it walks a fine line between tamping down inflation fuelled by the Iran war energy shock and supporting the euro-zone economy. French bond yields, which reflect the cost of government borrowing, surged to their highest level since 2002 last week amid a standoff over next year's budget. Street protests, driven in part by demands for more spending on public services, also degenerated into the worst street violence in years. That has prompted questions of whether the ECB could, for the first time, use a crisis-fighting tool aimed at combating moves in sovereign debt markets that the bank thinks could blunt its monetary policy moves. However, the criteria to activate the yet-to-be-used Transmission Protection Instrument (TPI) are strict, and most observers believe France's problems do not meet the threshold. "The bar remains high", Michel Martinez, economist at French bank Societe Generale CIB, told AFP, warning that the ECB risked getting dragged into national politics just months before presidential elections. "That would come at the cost of casting doubt on its independence," he added. ECB President Christine Lagarde, who also once served as France's finance minister, has reacted coolly when asked about the prospect of deploying the TPI. Asked about France's rising yields earlier this month, she responded: "The primary and first solution lies at home in France. And it has to do with fiscal policies." Investors will also be closely watching Lagarde's language at a press conference for any signals that the rising cost of government borrowing could reduce the likelihood of future ECB rate rises. Higher government borrowing costs usually feed into higher household borrowing costs since banks will not lend to people at a lower rate than states, potentially relieving the ECB of the need to raise rates itself. "A broad-based tightening of financial conditions would reduce the need for additional rate hikes," analysts at Italian bank UniCredit said Tuesday. "The impact of sovereign tensions on the outlook for monetary policy is likely to be a prominent topic," they added. Most economists predict the ECB will make the final hike of its current tightening cycle in December when it will be armed with updated growth and inflation forecasts. The economy has proven more resilient than feared after the outbreak of the Iran war and euro-zone inflation rose in September to a three-year high of 3.8 percent, well above the ECB's two-percent target.

AFP