ECB meeting puts French debt and rates in focus

The European Central Bank meets on October 29 with France's public finances, rising bond yields and the outlook for eurozone interest rates in focus.

French bond yields, which reflect the cost of government borrowing, rose last week to their highest level since 2002 amid a standoff over next year's budget. Street protests linked partly to demands for more public-service spending also turned violent.

The pressure has prompted questions about whether the ECB could use its Transmission Protection Instrument, a crisis tool designed to counter sovereign debt market moves that the bank believes could weaken the effect of its monetary policy. The tool has not yet been used.

Michel Martinez, an economist at Societe Generale CIB, said “the bar remains high” for using the instrument and warned that the ECB could be pulled into French politics before presidential elections.

ECB President Christine Lagarde said earlier this month that the first solution to France's rising yields lies in domestic fiscal policy.

Investors will watch Lagarde's comments for signs of how higher government borrowing costs could affect future rate decisions. UniCredit analysts said a broad-based tightening of financial conditions would reduce the need for additional rate hikes.

The ECB has already raised rates twice this year. Eurozone inflation rose in September to 3.8 percent, above the central bank's two-percent target.