The European Central Bank left interest rates unchanged on Thursday in a widely expected move, but clearly hinted at another rise in December, warning that high and rising energy costs were fuelling inflation risks. The decision was published only hours after President Christine Lagarde announced she would step down early, with her departure date reported as 7 February 2027. The deposit rate stays at 2.50%, with the main refinancing rate at 2.65%. Lagarde told her press conference that policymakers had debated a rise on Thursday before agreeing to wait for more data, and sources at the meeting told Reuters a rise on 17 December was now all but certain.

Energy prices pull policy in two directions

The Bank has raised rates twice this year to stop an energy price jump linked to the Iran war from becoming entrenched, and it warned that risks to inflation were skewed to the upside given the recent surge in oil and gas prices. At the same time, higher market borrowing costs are themselves doing some of the tightening work: ECB estimates circulated before the meeting suggested the latest rise in bond yields would lower growth by a cumulative 100 basis points and inflation by 90 basis points across 2027–28. France now pays a decades-high premium of 155 basis points over Germany to borrow for ten years.

Markets take the signal calmly

Lagarde stressed that governments must comply with EU fiscal rules to qualify for ECB support under its Transmission Protection Instrument, and said the Bank had instruments available if market moves threatened the smooth transmission of monetary policy. Analysts at FXStreet expect a 25-basis-point hike to 2.75% in December, which Lagarde clearly signalled, while most economists polled by Reuters expect just one or two more rises before the tightening cycle ends.

Sources: Reuters via 93-5 The Lloyd, FXStreet.