The ECB Holds Rates Steady as Christine Lagarde Announces She Will Leave Early

Keypoints:

• The European Central Bank kept its deposit rate at 2.50% on Thursday
• The decision was unanimous, but policymakers discussed raising rates
• Christine Lagarde said she will step down in February 2027, nine months before her term ends
• The ECB has raised rates twice in the last five months to fight energy driven inflation
• Markets still expect another hike in December

Europe's central bank paused on Thursday, but the bigger headline was about its boss. Christine Lagarde said she will leave as president of the European Central Bank in February, nine months before her eight year term was due to end.

On rates, the ECB left all three key rates unchanged. The deposit rate stays at 2.50%, the main refinancing rate at 2.65% and the marginal lending rate at 2.90%. The bank raised rates in June and again in September to fight a surge in inflation caused by higher energy prices. Eurozone inflation hit 3.8% in September, well above the ECB's 2% goal.

The decision to hold was unanimous, but it was not a simple one. Lagarde said several members of the Governing Council discussed whether it would have been right to raise rates right now. In the end they agreed to wait for more information. She called it a no hike decision and signaled that the pause may only last until December.

Why wait? The ECB says energy prices keep rising, which pushes up inflation and drags on growth. At the same time, borrowing costs are already climbing on their own. Lagarde said the average 10 year government bond yield in the eurozone has risen about 0.35 percentage points since the ECB's September projections. Mortgage rates in the eurozone climbed to 3.8% in August from 3.5% in July, and the bank's latest survey showed weaker demand for loans, especially mortgages. That tightening gives the ECB some breathing room.

Before the December meeting, policymakers will see two more inflation readings, third quarter growth numbers and wage data. Markets still expect a rate hike in December, and possibly another early next year. Bloomberg Economics analysts said Lagarde will probably end the current hiking cycle in December, which could give her successor some breathing room.

On her exit, Lagarde said a key reason is her wish to speak out on wider issues, which is harder to do from the ECB's neutral seat. The question of who replaces her will now become a major topic in Europe.