The European Central Bank is set to keep interest rates on hold on Thursday 29 October, in a widely expected decision overshadowed by bond-market turmoil in France and questions about President Christine Lagarde's future. This is an expectations story: at the time of writing the decision had not yet been announced.

Inflation risk pulls one way, bond yields the other

The central bank is widely expected to keep its deposit rate at 2.5%, after raising rates twice since June. Policymakers are expected to resume tightening in the coming months to stop an oil-price shock linked to the Iran conflict from feeding into other prices and wages, according to the Reuters report.

Lagarde's future in focus at the press conference

The ECB faces two pressures at once. On one side, the recent spike in oil prices has tilted inflation risks further to the upside, per Berenberg chief economist Holger Schmieding. On the other, a surge in government bond yields, especially in debt-laden France, has pushed up borrowing costs for households and businesses. Lagarde has said that rise in yields will curb growth and inflation, which complicates the case for an immediate hike. Money markets are currently pricing roughly three further rate increases, which would take the deposit rate to 3.25%, but that is market pricing, not a promise from the central bank.

Lagarde is set to be questioned about her own tenure at Thursday's press conference, amid speculation she may leave before presidential elections in France in the spring, despite having a year left of her ECB term. An early departure would allow French President Emmanuel Macron and other European Union leaders to fill one of the bloc's most powerful economic posts before a vote that opinion polls suggest could be won by the far right.

Sources: Reuters, Reuters Trading Day.