Lagarde announces early departure as ECB holds interest rates steady

Lagarde’s announcement, which has sparked speculation for months, was communicated to the 27 members of the Governing Council during a regular meeting to set the institution’s monetary policy direction.

As expected, interest rates were held at their current levels, with the deposit rate remaining at 2.5%.

The decision follows two previous rate hikes this year aimed at curbing inflationary pressures fueled by rising energy prices linked to tensions in the Middle East.

“Energy prices have continued to rise, posing upward risks to inflation outlook and downward risks to growth outlook,” according to the decision statement.

The ECB also noted that “financing conditions have tightened” since September, which is expected to “weigh on inflation and growth.”

The focus now shifts to the period following Lagarde’s departure, and the political considerations surrounding her successor. The successor will be designated by European Union leaders in accordance with treaties.

Lagarde’s departure in February provides French President Emmanuel Macron with the opportunity to participate in the selection process before the French presidential election in spring 2027.

Several names have already been circulating as potential successors, including former Dutch central bank governor Klaas Knot and Pablo Hernández de Cos, former governor of the Bank of Spain and current official at the Bank for International Settlements (BIS).

The succession also coincides with the need to renew several key ECB positions, including that of Chief Economist Philip Lane.

French borrowing costs have risen to unprecedented levels in over two decades, briefly exceeding 5% last week before falling back to 4.92% on Thursday. This reflects investor concerns about French public finances, the 2027 budget debate, and societal polarization ahead of the presidential election.

The gap between French and German ten-year bond yields has risen above 1.5 percentage points, a level not seen since autumn 2011.

The ECB could potentially activate its Transmission Protection Instrument (TPI), created in 2022 but never used, which allows for massive purchases of government bonds to contain market tensions.

However, Lagarde recently stated that solutions to curb rising French borrowing rates should primarily be found within France.

The ECB’s decision followed a similar announcement by the U.S. Federal Reserve, which also held rates unchanged after a September increase. Most economists still anticipate one final rate hike from the ECB in December, during Lagarde’s remaining term and when the monetary institute will have new growth and inflation forecasts.