Pomegra
The ECB held its policy rate at 2.50% on October 29 as Iran-driven oil lifts inflation to 3.8%, French bond stress builds and Lagarde sets a February exit.
- The ECB kept its deposit rate at 2.50% and its main refinancing rate at 2.65%, after hikes in June and September.
- Euro-area inflation reached 3.8% in September, a three-year high, with energy the largest driver.
- Christine Lagarde will step down as ECB president on February 7, 2027, about nine months before her term ends.
Lead
The European Central Bank left its ECB policy rate unchanged on October 29, holding the deposit facility at 2.50% and the main refinancing rate at 2.65%. The pause follows two quarter-point increases, in June and September, that lifted the deposit rate from 2.00%. The decision came as the oil shock from the Iran war pushed euro-area inflation to 3.8% in September, up from 3.2% in August and the highest in three years. Lagarde also told the Governing Council that she will leave office on February 7, 2027.
What Did the ECB Decide on October 29?
The ECB kept all three key interest rates unchanged, ending a run of two consecutive increases with a pause rather than a reversal. The hold was widely anticipated. In a Reuters poll of economists conducted October 5-8, 70 of 73 respondents expected no change this month.
Euro-area growth remains weak. Credit standards tightened and loan demand softened in the third quarter. That limits how far the Governing Council can push interest rates higher without damaging activity, and it explains the preference for a measured response to the price surge. European equities were largely flat into the decision. The STOXX 600 was little changed and the DAX gained about 0.2%.
Why Is a December Hike Expected?
A December increase is expected because inflation is running far above the 2% target and the oil shock has tilted risks further to the upside. In the same poll, 64 of 73 economists forecast a quarter-point rise on December 18, which would take the deposit rate to 2.75%. A majority of 58% see 2.75% as the peak, while 24 economists now see 3.00%, up from two a month earlier.
Money markets are more aggressive. Futures price odds of a December move above 80% and roughly three further increases over the coming year, which would take the deposit rate toward 3.25%.
The energy channel is direct. The war that began on February 28 with US-Israeli strikes on Iran pushed Brent crude from about $71 a barrel to above $100 within two weeks. The Strait of Hormuz was effectively closed within six weeks. Brent has traded above $100 for much of the autumn and sits roughly 75% higher than a year ago. Energy added 1.71 percentage points to the September inflation reading, and services contributed 1.52 points. Policymakers are trying to keep higher fuel costs from feeding into wages and broader pricing.
How Serious Is the French Bond Stress?
French bond stress is the most acute sovereign risk in the euro area, with the 10-year OAT yield reaching 5.14% on October 22, its highest since 2002. The spread over German Bunds widened from about 96 basis points in mid-September to roughly 175-178 basis points, a level last seen during the euro crisis of 2011.
Yields eased after Moody's maintained France's sovereign rating. On October 28 the 10-year OAT yielded 4.94% against 3.37% for the Bund, a spread of about 157 basis points. Drivers include fiscal concerns, unwinding carry trades and political uncertainty before the 2027 presidential election.
Rate increases and sovereign stress pull in opposite directions. Higher policy rates raise refinancing costs for the most indebted members. The ECB's first line of defence is flexible reinvestment of proceeds from its asset-purchase portfolios. The Transmission Protection Instrument (TPI), designed to counter disorderly spread widening, has never been used, and direct intervention is seen as remote at current levels.
Who Will Succeed Lagarde?
The European Council will appoint Lagarde's successor under Article 283 of the Treaty on the Functioning of the European Union. Spain's Pablo Hernandez de Cos and the Netherlands' Klaas Knot are the leading candidates. Her departure date, February 7, 2027, leaves her term unfinished by roughly nine months. It also moves the succession decision ahead of the French presidential campaign, giving France and Germany room to agree on a nominee beforehand.
The Governing Council gave Lagarde a standing ovation after the announcement. The transition adds a leadership question to a year in which the bank has reversed its easing cycle and faces a supply-driven price shock.
Market Reaction and Positioning
The euro has traded near 17-month lows against the dollar, with the pair holding above 1.11. Higher expected policy rates have not offset concerns over growth and French fiscal risk. Bund yields at 3.37% reflect the repricing of the ECB path, while the French premium shows investors demanding additional compensation for political and fiscal uncertainty.
What Comes Next for the ECB?
The next decision, on December 18, will be taken with new staff projections and a fresh inflation reading. The central case is a 25 basis point increase to 2.75%. An escalation in the Gulf that pushes Brent higher would raise the odds of a larger terminal rate. A durable reopening of Hormuz or a sharp slowdown in the French bond market would favour a pause.
Outlook
The ECB has paused at 2.50% but signalled that tightening is not finished. Oil prices above $100, inflation at 3.8% and weak growth leave little room for easing. French bond stress and the coming change at the top of the bank add institutional risk to the policy path. December is the next test of how far the Governing Council will go.
