• The ECB is set to leave policy unchanged at its October meeting. Officials are clearly content with the current situation as inflation continues to hover around target and rates are at neutral. Today’s healthy PMI print has also eased concerns around near-term downside risks to activity. It’s set to be a low-key meeting, with the focus likely to be on the inflation risk assessment and the Q&A.
• Attention will quickly shift ahead to the December meeting. Any policy action this year is unlikely but it would be harder for the ECB to dismiss an undershoot in its updated inflation projections. We continue to expect more ECB easing in 2026.

The ECB sees a high option value in waiting

The ECB is set to leave policy unchanged at its October meeting. Headline inflation has been within 0.2pp of the target since March and the deposit rate is at the estimate of neutral. Policymakers have been out in their droves to highlight the current “good place” for the central bank. Since the September meeting, economic data has been broadly in line with expectations and the near-term market assumptions used for the central bank’s projections still look valid. As the minutes of the September meeting put it, there is “a high option value to waiting for more information”. That will still hold.

In short, it’s set to be a low-key meeting. There will be no new projections and any change in guidance (“a data-dependent and meeting-by-meeting approach”) is clearly unlikely. The focus will be on the risk assessment and the press conference. Even then, it will probably be slim pickings but Lagarde may offer her view on global financial stability risks following the IMF’s report this month and BoE Governor Bailey’s recent comments.

There could also be a focus on fresh data. The first estimate of euro area Q3 GDP will be released on the day of the meeting, as well as German inflation for October (euro area aggregate HICP will be released the following day). We assume that the ECB will have a good steer on those numbers, but doubt they will influence the immediate policy decision. Any weakness in the GDP numbers (we are tracking 0.0% Q/Q, in line with the ECB) would be countered by today’s solid flash PMI numbers for October which suggests downside risks may have faded. The euro area composite output figure reached a 17-month high of 52.2, despite the drag from political turmoil on the French number, and the output prices gauge rose.

Activity data has been subdued at best…

…but business surveys have improved, outside of France

The ‘good place’ mentality risks looking static and backward-looking

Looking further ahead, the German fiscal shift is set to take hold from 2026 but the euro area’s overall fiscal stance is likely to be broadly neutral with consolidation efforts in France (possibly), Italy and elsewhere. Meanwhile, the drag from tariffs is set to continue to weigh on activity. Euro area exports to the US are down 15% relative to the 2024 average. Despite today’s PMIs it might yet become more of a fine line between ‘resilience’ to the trade shock and ‘structural weakness’.

On prices, forward-looking wage indicators are clearly pointing downwards as the scope for real pay catch-up after the 2021-22 inflation shock diminishes. Further euro strength (see here for our FX forecasts) is also set to weigh on import prices. Both we and the ECB expect that inflation will undershoot the target in 2026.

The ECB’s next batch of projections in December will certainly be interesting in that light. Notably, the central bank is projecting a slight undershoot on headline inflation in 2027 (at 1.9%), despite the expected boost from the launch of the EU Emissions Trading System 2 (ETS2). The projection horizon will be pushed forward to 2028 in the next update. It would clearly be harder for the ECB to balance an undershoot in those numbers with its current contentment around the policy setting. Looking ahead, political risks may also re-emerge by year-end – the current French PM may have engineered a truce for now, but there is plenty of scope for further flashpoints ahead as budget discussions progress.

While it will be a more interesting meeting, recent comments from officials mean that the bar is very high for December to become ‘live’ in terms of policy changes – even if data releases between the meetings (e.g. Q3 wage growth, November CPI and activity indicators) were to all come in soft. But we worry that policymakers risk becoming too static and backward-looking with their ‘good place’ mindset. We continue to expect further easing next year once officials are forced to confront the reality of fading underlying inflation pressures.

Wage growth is set to cool relatively quickly into next year

Fading services inflation would pave the way for an undershoot