FRANKFURT — The European Central Bank held its main refinancing operations rate at 4.50 percent, the marginal lending facility at 4.75 percent and the deposit facility at 4.00 percent, marking the second consecutive pause after 10 straight increases since July 2022. Eurozone sovereign yields climbed across the curve following the decision.
The German 10-year bund yield rose seven basis points to 2.68 percent. The French 10-year OAT yield increased eight basis points to 3.21 percent.
ECB President Christine Lagarde emphasized the Governing Council's data-dependent approach, saying rates would remain restrictive "for as long as necessary." She cited persistent underlying inflation pressures, particularly in services, as the primary concern. Core inflation, which excludes volatile food and energy prices, stood at 3.6 percent year-over-year in June, above the ECB's target. "We are not done with inflation," Lagarde said, adding that the option for additional hikes remains on the table.
The hawkish hold drove an immediate repricing across the European yield curve. The German 2-year yield jumped nine basis points to 3.12 percent, causing the 2s/10s curve to steepen two basis points from its earlier flat position — a signal that bond investors are adjusting for a prolonged period of higher rates and elevated duration risk in longer-dated European paper. Peripheral spreads widened, with the Italy-Germany 10-year spread expanding three basis points to 195 basis points as investors priced additional risk into higher-debt sovereigns under a tighter policy regime.
European equity markets were mixed. The Euro Stoxx 50 closed down 0.6 percent, led by declines in rate-sensitive sectors. European bank stocks outperformed: the Euro Stoxx Banks index rose 0.8 percent, as higher-for-longer rates support net interest margins at lenders including Deutsche Bank and BNP Paribas.
The euro strengthened against the U.S. dollar, with EUR/USD rising 0.3 percent to 1.0820 as markets recalibrated European policy expectations. Traders now price a 30 percent chance of a 25 basis point hike before year-end, up from 15 percent before the meeting.
