President of the European Central Bank Christine Lagarde to step down in February

On Thursday, the European Central Bank (ECB) maintained its key deposit rate at 2.5%, during a meeting disrupted by President Christine Lagarde's announcement that she would depart her position next February, months earlier than her term's completion. Inflation stood at 3.8%, nearly double the ECB's 2% objective. The choice came after two rate increases this year, primarily driven by surging energy costs stemming from the Iran conflict.

The ECB's refinancing operations and marginal lending facility rates also stayed at 2.65% and 2.90% respectively.

In their statement, the ECB affirmed that escalating energy prices posed risks to inflation and growth projections, although underlying inflation remained stable, and wage increases were not significant at the moment. However, they cautioned that the magnitude and duration of the energy shock could still escalate inflation and stifle growth.

The central bank highlighted that borrowing costs had tightened since their last assembly, potentially exerting downward pressure on inflation and growth. They reaffirmed their stance that they were not committing to a specific rate trajectory.

Inflation in the eurozone climbed to 3.8% in September, from 3.2% in August, and the decision to hold rates was widely anticipated. The meeting occurred shortly after Lagarde disclosed her intention to resign on February 7, 2027, almost nine months prior to the end of her eight-year tenure. The ECB offered no explanation, but recent reports have linked the timing to the French presidential election in April 2027.

Lagarde expressed satisfaction with her tenure, stating that she had left the institution with a sense of a job well done and an ECB poised for the future. Her departure sparked a scramble for leadership, with Spain's Pablo Hernández de Cos and the Netherlands' Klaas Knot emerging as top contenders. Two other Executive Board positions, including that of chief economist Philip Lane, also became vacant in the first half of 2027.

The announcement took place amid a political and fiscal crisis in France, with French 10-year borrowing costs surpassing 5% for the first time since 2002. The yield on these bonds reached around 5%, with a gap of approximately 155 basis points compared to German debt. Ratings agency Moody's maintained France's Aa3 rating but with a negative outlook, as the country's legislature struggled to pass its budget for the following year.

The bond market had effectively assumed the ECB's role in evaluating the situation, according to a note from Dutch bank ING. Lagarde had previously dismissed expectations of a bailout, stating that the primary and most immediate solution lay within France and was tied to fiscal policies. The ECB reiterated that its Transmission Protection Instrument (TPI), a tool never used to purchase bonds of countries experiencing unjustified borrowing cost surges, remained available to counter unwarranted, disorderly market dynamics that could endanger the effective transmission of monetary policy.

They also maintained their balance sheet policy, with their bond holdings continuing to decline as they no longer reinvest maturing debt, despite ING's expectation of a brief pause in this winding-down process.