ECB holds deposit rate at 2.5% after debating a hike

Rates held after energy and bond pressure

The ECB also left its main refinancing rate at 2.65% and its marginal lending rate at 2.90%. The deposit rate is the rate the ECB pays banks on overnight deposits. The ECB has raised rates twice this year, Bloomberg reported.

In a statement, the ECB said financing conditions had tightened since the Governing Council's last meeting, which was likely to weigh on inflation and growth. Eurozone inflation reached 3.8% in September, up from 3.2% in August, the bank said. ECB President Christine Lagarde said energy prices were 18.9% higher than a year earlier.

She told reporters in Frankfurt that the average 10-year eurozone government bond yield had risen by around 35 basis points since the cut-off date for the September projections. Mortgage rates climbed to 3.8% in August from 3.5% in July, and banks tightened lending standards for companies in the third quarter, she said. The council judged it was well positioned enough to hold and that a measured approach remained appropriate, she said.

French 10-year yields rose above 5% last week for the first time since 2002, Yahoo Finance reported, and the spread over German Bunds recently moved between roughly 155 and 170 basis points. French debt is close to 120% of GDP and the budget deficit remains above 5%.

Lagarde's early exit

Hours before the rate decision, the ECB said Lagarde would step down on 7 February 2027, about nine months before her eight-year term ends in late October. "I don't think that I can remain neutral," she told reporters. She said she wanted the freedom to speak on matters that are not monetary policy.

European Council President António Costa praised her "steady and determined stewardship" through the pandemic, war in Europe, energy crises and inflation shocks. Costa said the process of appointing her successor would begin immediately. CNBC reported that Lagarde has indicated she does not intend to run for the French presidency. The Financial Times has reported she is a leading candidate to lead the World Economic Forum.

The succession race is already under way. The Irish Times reported that former Dutch and Spanish central bank governors Klaas Knot and Pablo Hernández de Cos are seen as the front-runners. Economists surveyed by Bloomberg in October reckoned De Cos was favorite. The European Council will lead the appointment. German public broadcaster ARD reported that the early exit lets Emmanuel Macron, Chancellor Friedrich Merz and other leaders agree a successor before France's spring 2027 presidential election. Marine Le Pen leads in the polls, The Irish Times reported.

Markets and next steps

Bloomberg reported that traders pared bets on further tightening to 70 basis points by the end of 2027 from 72 before the decision, that market wagers on a December hike rose to an 88% probability from 80%, and that the euro fell to $1.1111, a 17-month low. UBS said markets are pricing excessive tightening and forecast the euro to recover toward 1.16 by year-end.

Bloomberg reported that policymakers are widely expected to raise rates again in December, when updated economic projections arrive, and that third-quarter eurozone growth probably slowed to 0.2%, according to a poll of analysts before Eurostat publishes data on Friday. Lagarde said the bank decides meeting by meeting. "Unless there were major developments, the direction of travel is quite clear for all of us," she said.