Euro Closes at $1.1195 as Markets Weigh Potential ECB Rate Hike in December
Key Facts
The euro closed at $1.1195 on November 3, according to EL7 data, as markets focus on the possibility of an interest rate increase by the European Central Bank at its next meeting. The bank left its three key interest rates unchanged in its decision issued on October 29. The deposit facility rate stood at 2.50%, the main refinancing rate at 2.65% and the marginal lending rate at 2.90%. ECB President Christine Lagarde said the Governing Council "is not pre-committing to a particular rate path." That means the December decision will remain tied to developments in the inflation outlook and the data coming in to the council.
But Lagarde's remarks at the news conference after the October meeting signaled the near-term policy direction. She said "the direction of travel is clear to us all unless there is a major development," identifying the December meeting as the council's next milestone. Reuters reported that three policymakers said a rate increase to 2.75% at the December 17 meeting was "almost certain," unless energy prices suddenly collapsed. That reading is consistent with the ECB's October survey of monetary policy analysts, in which the median forecast for the deposit facility rate in December was 2.75%. A total of 69 respondents took part in the estimate, putting an expected hike at the heart of the next monetary policy debate.
The case for a hike is linked to an energy-led inflation wave, according to a Reuters report, while the ECB said energy prices continued to rise. Lagarde said this "poses upside risks to the inflation outlook and downside risks to the growth outlook." She added that underlying inflation had remained broadly stable and that wages had not shown a material response up to that point. By contrast, the Reuters report said rising bond yields could weigh on growth and inflation, explaining discussion of a possible hike followed by a pause. The trade-off between containing price pressures and avoiding further strain on economic activity remains part of the council's assessment of incoming data.
The ECB's September projections showed its staff expected euro area GDP growth of 0.9% in 2026 and 1.4% in 2027. The projections put inflation at 3.0% in 2026 and 2.5% in 2027. They also forecast headline inflation rising to 3.6% in the fourth quarter of 2026 as energy inflation increases, before easing in early 2027 as the annual energy comparison effect fades. In the October survey, the median analyst forecast for inflation was 3.9% in the fourth quarter of 2026, based on 69 responses, then fell to 2.1% in the final quarter of 2027. A total of 66.7% of participants saw inflation risks in 2026 skewed to the upside, compared with 30.4% who considered them balanced and 2.9% who saw them tilted to the downside.
On growth, the median monetary policy analyst forecast for quarterly growth was 0.2% in the third quarter of 2026, based on 68 responses, then 0.3% in the fourth quarter, based on 69 responses. These estimates provide context for the bank's concern about the impact of energy prices and bond yields on activity, alongside rising inflation expectations at year-end. The council's next monetary policy meeting is scheduled in Frankfurt for December 16 and 17. A news conference is scheduled to follow on December 17, the date policymakers who spoke to Reuters cited as a likely time for a rate hike. Ahead of the meeting, the bank's agenda lists Lagarde's participation in the "New Dialogues for the Future" event in Milan on November 5, without the calendar promising that a text of the event will be made available.