ECB Holds Interest Rates Steady As Lagarde Decides To Leave

(RTTNews) - The European Central Bank left its key interest rates unchanged on Thursday, as expected, after raising them in September, and the chief Christine Lagarde revealed her decision to step down next year, as policymakers wait for the effect of the past moves amid surging inflationary pressures and study the impact of the turmoil in French bond yields.

The Governing Council, led by ECB President Lagarde, held the deposit rate steady at 2.5 percent, the main refinancing rate at 2.65 percent, and the marginal lending rate at 2.90 percent.

"The increased magnitude and duration of the energy shock, as well as the implications for indirect and second-round effects, are likely to drive up inflation and lower growth," the ECB said. "Financing conditions have tightened since the Governing Council's last meeting, which is likely to weigh on inflation and growth."

The ECB affirmed that policymakers would follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance.

Last week, the French 10-year bond yield crossed the 5.0 percent threshold for the first time since 2022 and moved over the U.S. equivalent for the first time since 2013. The public unrest against a host of issues that range from the rising cost of living to high education and fuel cost is increasing in the EU countries, and this is hurting investor confidence.

Hours ahead of the decision announcement on Thursday, Lagarde revealed her decision to step down from her post at the helm of the bank on February 07, 2027, roughly nine months ahead of the expiry of her eight-year term.

Speculation of an early exit for Lagarde has been rife since early this year, as such a move would facilitate EU leaders to elect a suitable euro-centric successor before the French presidential election in April.

Her era at the ECB was marked by significant events such as one of the worst pandemics the world has seen, the Ukraine war, trade disputes with the U.S., and some of the biggest inflation shocks.

The 70-year-old Lagarde, who formerly served as the finance minister in the Nicolas Sarkozy administration and also as the managing director of the International Monetary Fund, is likely to take up the job to chair the World Economic Forum. Lagarde has already said that she will not run in the French presidential election in April next year.

Lagarde's decision to resign has been communicated to the European Council president Antonio Costa, and her successor would be appointed in due course, the ECB said in a statement.

Former Dutch central bank governor Klass Knot and Pablo Hernandez de Cos, who is the former chief of the Bank of Spain and the current general manager at the Bank of International Settlements, are the frontrunners in the race to succeed Lagarde as the ECB chief.

ING economist Carsten Brzeski said comments made by Lagarde at the post-decision press conference suggest the bank is gearing up to hike interest rates in December.

"It would require a sharp worsening of the growth outlook to probably prevent the ECB from hiking once again," Brzeski said. "…with downside risks to the growth outlook and upside risks to the inflation outlook, the ECB seems to be increasingly concerned about stagflationary forces, without calling them stagflationary."