ECB expected to pause on October 29 after euro area inflation climbs to 3.8%

The European Central Bank meets on October 28 and 29 with inflation running well above its 2 percent target. Eurostat confirmed on October 16 that annual inflation in the euro area reached 3.8 percent in September, up from 3.2 percent in August and 2.2 percent a year earlier. Inflation in the European Union as a whole was also 3.8 percent.

Energy was the largest driver, contributing 1.71 percentage points to the annual rate, followed by services at 1.52 points, non-energy industrial goods at 0.29 points and food, alcohol and tobacco at 0.25 points. Inflation rose in 23 member states during the month and fell only in Slovakia. Rates ranged from 1.0 percent in Sweden to 6.5 percent in Romania; Italy's rate jumped to 4.2 percent from 3.2 percent.

The ECB has already tightened twice this year. The deposit facility rate rose to 2.25 percent on June 17 and to 2.50 percent on September 16, with the main refinancing rate at 2.65 percent and the marginal lending rate at 2.90 percent, according to the ECB's table of key interest rates. Announcing the September move, the Governing Council said it had decided "to raise the three key ECB interest rates by 25 basis points."

Most forecasters expect a pause this month. Danske Bank's research team expects the deposit rate to stay at 2.50 percent on October 29 and ECB President Christine Lagarde to avoid firm guidance, with a final 25 basis point increase in December taking the rate to 2.75 percent. CaixaBank Research reported on October 20 that markets expect rates to be held in October and assign an 84 percent probability to a December increase.

The decision lands in a tense week for European markets. French 10-year yields have risen to 4.94 percent and the spread over German Bunds has widened to 148 basis points on concern about France's public finances, which has also weighed on the euro. The ECB's following meetings are scheduled for December 17 and February 4.