The European Central Bank left rates unchanged as expected this morning, but the accompanying communications helped investors calibrate policy expectations for the year ahead.

The statement itself was fairly anodyne. Officials reiterated that they were not committed to any particular rate path and would continue to take a data-dependent, meeting-by-meeting approach. They acknowledged that a larger and longer-lasting energy shock, together with its indirect and second-round effects, was likely to push inflation higher and growth lower. But they also said that “underlying inflation has remained broadly stable so far and wages do not show a material response at this stage”, and pointed to a potential offset: financing conditions have tightened since their last meeting, which is likely to weigh on both inflation and growth — an implicit nod to the turbulence in French bond markets.

Outgoing President Lagarde presented a balanced economic outlook in her opening remarks at the press conference. She said activity remains resilient and suggested that growth should be underpinned in the near term by investment in artificial intelligence and by government spending, with exports also expected to pick up. Headline inflation is likely to stay above target in the coming quarters, but there has so far been little evidence of second-round effects, and pressures should fade thereafter as energy prices come down and higher interest rates weigh on growth and demand. Near term inflation expectations have risen, she noted, but remain anchored over longer horizons.

Lagarde was extremely careful in answering questions on how France’s fiscal troubles could affect the bank’s policy path. She acknowledged a rise in long-term borrowing costs around the world and a more recent tightening in financial conditions, and warned that heavily-indebted countries should plan their fiscal policies on the assumption that rates are higher and will probably remain so. Further fiscal uncertainty could tighten conditions and weaken consumption and investment, she conceded, but she also appeared to suggest that rising energy prices are still playing a bigger role in inflation and rate dynamics. She stressed that the ECB has the tools to deal with unwarranted, disorderly market moves, saying that it has “instruments available to respond” should they threaten the smooth transmission of monetary policy, and noted that the criteria and conditions attached to those instruments are well understood.

The messaging was, on balance, somewhat hawkish. By pointing to the conditions attached to the bank’s instruments, Lagarde confirmed that outright intervention remains a distant prospect, implying that further monetary dilution is unlikely for now. And by playing down the idea that stress in France is influencing the policy path, she helped ratify current market pricing for a hike in December followed by at least two more in 2027.

The euro remains vulnerable to further downside, driven in part by political uncertainty in a number of core countries and high energy prices ahead of winter. But the currency also looks deeply oversold and could find its footing should the “US exceptionalism” trade that has dominated in recent months begin to fade. We remain constructive on the longer-term outlook.