The European Central Bank left its three key interest rates unchanged on Thursday, holding the deposit facility at 2.50%, the main refinancing rate at 2.65% and the marginal lending rate at 2.90%. The pause had been expected and follows a 25 basis point increase in September, CNBC reported.
Earlier the same day, Christine Lagarde told the Governing Council and European Council President António Costa that she will step down as ECB president on 7 February 2027, the bank said. Euronews reported that this is around nine months before her eight-year term ends. Her successor will be appointed by the European Council under the nomination process in Article 283 of the Treaty on the Functioning of the European Union.
ENERGY AND FINANCING CONDITIONS
In its statement the Governing Council said energy prices had continued to rise, posing upside risks to inflation and downside risks to growth. It added that financing conditions had tightened since its last meeting, which is likely to weigh on both, and said it is not pre-committing to a particular rate path.
The Governing Council debated whether a hike was appropriate but unanimously decided it was well positioned enough to hold, Lagarde said at her press conference. She pointed to higher energy costs and a sharp rise in long-term financing costs, with the average 10-year sovereign yield up by around 35 basis points, according to CNBC.
Money markets priced around a 67% probability of a December hike after the announcement, according to LSEG data cited by CNBC. Dean Turner, chief euro zone and UK economist at UBS Global Wealth Management, said the decision should be viewed as a hawkish pause rather than the end of the tightening cycle.
TWO HIKES AND AN ENERGY SHOCK
The ECB raised rates in June for the first time since 2023, CNBC reported, after energy prices climbed following the outbreak of the US-Israeli war with Iran in February. September brought the second increase of the year for the council, which sets interest rates for the 21 countries that use the euro.
Euro area inflation rose to 3.8% in September from 3.2% in August, its highest since September 2023, and energy price inflation reached 18.8%.
FRENCH BONDS AND THE SUCCESSION
French 10-year borrowing costs rose above 5% last week for the first time since 2002 and stood at around 5% on Thursday, roughly 155 basis points over German debt, Euronews reported. Moody's kept France's Aa3 rating unchanged last Friday but with a negative outlook.
The council repeated that its Transmission Protection Instrument is available to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across all euro area countries.
The ECB gave no reason for the timing of Lagarde's exit; Euronews said reports since February have linked it to France's presidential election in April 2027. Two other seats on the six-member Executive Board, including that of chief economist Philip Lane, also open in the first half of next year. Lagarde said she leaves an ECB that is fit for the future.
THE TGB VIEW
The six groups that dominate France's banking system, from BNP Paribas to La Banque Postale, are each directly supervised by the ECB, and the TGB market profile of France puts that system's consolidated assets at €10.5tn in March 2026, about 3.6 times GDP. That is the banking system behind a French 10-year yield of around 5% on Thursday, roughly 155 basis points over German debt. Lagarde steps down on 7 February 2027, and her successor will be appointed by the European Council under Article 283 of the Treaty.
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