EU Midday Digest - 18 Sep 2026

ECB keeps policy rate at 4.25%, citing high inflation expectations.

Overnight & European Session

The European Central Bank (ECB) has maintained its policy rate at 4.25%, as inflation expectations remain elevated. According to the ECB's Consumer Expectations Survey, the median 12-month inflation expectation is at 3.2%, with the three-year horizon remaining at 3.6%. This decision has driven the euro to 1.1485 against the US dollar, while the US 10Y yield has dropped to 4.95%. The ECB's stance has also influenced the European Stoxx, which has fallen by 0.83% to 6,270. The market is now focused on the ECB's forward guidance, with investors watching for any signs of a potential rate cut in the near future.

Key Themes Today

• Rates: The ECB's decision to keep the policy rate at 4.25% has significant implications for the eurozone economy. According to Goldman Sachs, the ECB's restrictive stance will limit upside for risk assets and keep euro-denominated sovereign yields elevated. The supporting evidence includes the ECB's Consumer Expectations Survey, which shows that inflation expectations remain high. This implies that investors should expect the euro to remain range-bound against the US dollar and keep an eye on the German 10-year yield, which is likely to stay above 2% until clear disinflation materializes.
• Inflation: The ECB's inflation expectations survey has shown that the median 12-month inflation expectation is at 3.2%, with the three-year horizon remaining at 3.6%. According to Bloomberg, this suggests that the ECB will maintain its hawkish stance, keeping interest rates high to combat inflation. The supporting evidence includes the ECB's statement that "inflation expectations are still anchored above the 2% target and exhibit limited downward momentum." This implies that investors should expect inflation to remain high, driving up yields and supporting the euro.
• Credit: The ECB's decision to keep the policy rate at 4.25% has significant implications for credit markets. According to JPMorgan, the ECB's restrictive stance will keep credit spreads tight, making it more difficult for companies to access credit. The supporting evidence includes the ECB's statement that "the risk of a recession has increased," which could lead to a decrease in credit demand. This implies that investors should expect credit spreads to remain tight, making it more challenging for companies to issue debt.
• Geopolitics: The ongoing conflict in the Middle East has significant implications for global markets. According to the Bank of International Settlements (BIS), the conflict has led to a decline in global trade, driving up prices and supporting inflation. The supporting evidence includes data from the IMF/University of Oxford Portwatch database, which shows a decline in maritime traffic. This implies that investors should expect geopolitical tensions to remain high, driving up prices and supporting inflation.
• Central Banks: The Bank of England (BoE) has maintained its policy rate at 3.75%, citing high inflation expectations. According to the BoE, the decision to keep the policy rate at 3.75% is driven by the need to combat inflation, which remains above the 2% target. The supporting evidence includes the BoE's statement that "the risk of a recession has increased," which could lead to a decrease in credit demand. This implies that investors should expect the BoE to maintain its hawkish stance, keeping interest rates high to combat inflation.

What to Watch

Today, investors will be watching the US CPI release, with a consensus estimate of 3.5% year-over-year. A break above 3.7% could confirm the reflation trade and pressure emerging market FX. The US 10Y yield is currently at 4.95%, with resistance at 5.05%. A clean break above this level could confirm the bearish trend and drive up yields. The market is also focused on the ECB's forward guidance, with investors watching for any signs of a potential rate cut in the near future. Will the ECB maintain its hawkish stance, or will it pivot to a more dovish approach?