ECB holds deposit rate at 2.50 percent as Lagarde sets her exit

What happened

The European Central Bank kept its three key interest rates unchanged on Thursday 29 October, leaving the deposit rate, which banks earn on overnight deposits, at 2.50 percent. ^[1]

Its release, 'Monetary policy decisions', keeps the main refinancing rate at 2.65 percent and the marginal lending rate at 2.90 percent. Those levels took effect on Wednesday 16 September; the deposit rate had been 2.25 percent since Wednesday 17 June, the ECB's table of key rates shows. ^{[1, 3]}

ECB President Christine Lagarde said the Governing Council debated whether an increase was appropriate, then decided unanimously to hold. Zonebourse, writing for MarketScreener, reported the hold as widely expected. ^{[2, 8]}

Why it matters

Inflation is moving away from the 2 percent target: the ECB said it reached 3.8 percent in September, from 3.2 percent in August, with energy inflation at 18.9 percent. The bank said energy prices have gone beyond the path in its September staff projections. It said that is likely to keep headline inflation 'well above target over the coming quarters.' ^[2]

Why it held

The ECB said underlying inflation has stayed broadly stable and wages show no material response so far. It said financing conditions have tightened since September, which is likely to weigh on inflation and growth. ^{[1, 2]}

Lagarde said average 10-year government bond yields were up around 35 basis points, hundredths of a percentage point, since the September projections were cut off. Carsten Brzeski of ING wrote that 'the bond market has taken over the ECB's job.' ^{[2, 7]}

The president's exit

Hours before the decision, the ECB said Lagarde had told the Governing Council and European Council President António Costa that she will step down on Sunday 7 February 2027. Her term would otherwise have ended in October 2027, she said. ^{[4, 2]}

Lagarde said she is leaving early for 'the freedom of speech, the freedom of expression' on matters beyond monetary policy. UPI reported that she gave no reason, which the press conference transcript does not bear out. UPI and ING both named Pablo Hernández de Cos and Klaas Knot as the leading candidates to succeed her. ^{[2, 6, 7]}

What settles it next

The next policy meeting ends on Thursday 17 December, with new staff projections, two more inflation readings and third-quarter GDP in hand, Lagarde said. Unless there was a major development, she said, 'the direction of travel is quite clear for all of us.' ^{[5, 2]}

Lagarde's last meeting as chair ends on Thursday 4 February 2027, the ECB's calendar shows. Felix Feather of Aberdeen Investments told Family Wealth Report he expects further hikes in December and March. ^{[5, 6, 9]}

Who it reaches

No company is tagged: the decision sets what euro-area banks earn on deposits at the central bank and pay to borrow from it. The ECB said banks tightened credit standards on loans to firms in the third quarter, and mortgage rates reached 3.6 percent in August. ^{[1, 2, 3]}