ECB Holds Deposit Rate at 2.5% as Lagarde Announces Early Exit; Euro Slips to Around $1.113

The European Central Bank left interest rates unchanged on Thursday and warned that inflation risks were rising on the back of surging energy costs, Reuters reported, in a decision overshadowed by the announcement hours earlier that President Christine Lagarde will leave her post on 7 February 2027.

The Governing Council, meeting in Frankfurt, kept the benchmark deposit rate at 2.5%, according to German news agency DPA. Reuters said the move had been well telegraphed and could firm up market bets on a rate increase in December.

Rates on hold amid energy-driven inflation

DPA reported that the sharp rise in energy prices following the outbreak of war in Iran has lifted consumer prices across the eurozone. Inflation in the bloc rose to 3.8% in September, its highest level in three years, driven largely by fuel costs and well above the ECB’s 2% medium-term target, the agency said. It added that a hike on Thursday would have been the central bank’s third this year.

Reuters and The National both described the ECB as being in the middle of a rate-hiking cycle aimed at stopping higher energy costs from spreading into wider prices and wages. The National noted that a surge in government bond yields, particularly in France, has already raised borrowing costs for households and businesses, which Lagarde has said will weigh on growth and inflation.

Ed Hutchings, head of rates at Aviva Investors, told Reuters that with two hikes already delivered and close to three more priced in, markets were likely right to expect further increases.

Lagarde to leave in February

Shortly before the rate announcement, the ECB said Lagarde had informed the Governing Council and European Council President António Costa that she would step down on 7 February 2027. DPA said that is nearly nine months before her eight-year term was due to end in late October 2027.

“I leave this institution with a sense of good work done,” Lagarde said in a short video shared on social media, The National reported. Costa said the search for her successor would begin immediately. The National said the timing gives current EU leaders room to choose a replacement well before France’s presidential election.

Klaas Knot and Pablo Hernandez de Cos, the former central bank governors of the Netherlands and Spain, are seen as frontrunners, according to The National and Fidelity International economist Conor Parle, who spoke to Reuters. Marchel Alexandrovich of Saltmarsh Economics told Reuters that Executive Board members Isabel Schnabel and Philip Lane are also set to depart, pointing to a significant reshuffle in the first half of 2027.

Market reaction

The euro fell 0.2% to around $1.113, its weakest since May last year, while two-year government bond yields dropped sharply, Reuters reported. The pan-European STOXX 600 index was up 0.95%. Fiona Cincotta, senior market analyst at City Index, told Reuters the market had read the ECB’s message as slightly more dovish.

“Lagarde’s resignation is the bigger story than today’s widely expected decision,” said Felix Feather, economist at Aberdeen Investments, adding that he did not expect the change to alter the near-term rate outlook. Lale Akoner, global market strategist at eToro, said the departure adds uncertainty at an awkward time, with inflation elevated and French bonds under pressure.

What’s next

Alexandrovich said Thursday’s decision signals that a December rate hike is firmly in play, citing upside risks to the inflation outlook. EU leaders will now begin the process of selecting Lagarde’s successor ahead of her 7 February departure.

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