What a day in Frankfurt. An uneventful policy action but a very eventful day on other issues. The ECB just announced that interest rates remain unchanged. The main argument behind this decision is that there are currently very little knock-on effects from higher headline inflation, while, at the same time, financing conditions, that is mainly bond yields, have become more restrictive. The breaking news, however, came just a few hours earlier: ECB president Christine Lagarde announced that she will step down on 7 February 2027.
As regards monetary policy, a pause after two rate hikes this year was expected, even if macro developments since the last meeting could have justified another rate hike. Headline inflation increased again in September and most leading indicators point to continued resilience in the eurozone economy. However, the surge in bond yields on the back of the French crisis is already imposing a new restrictive monetary policy stance. Or in other words, the bond market has taken over the ECB’s job.
As regards France, the juicy part will only follow during the press conference. Political and fiscal concerns in France, and the resulting widening in French spreads, have raised questions about whether the ECB could intervene through the Transmission Protection Instrument (TPI), which allows it to purchase securities issued by member states whose financing conditions have deteriorated for reasons not justified by country-specific fundamentals. And for countries that are compliant with the EU fiscal framework. It’s hard to argue that this is a condition France currently fulfils. As the ECB prepares for today’s press conference, we hope it remembers the experience of March 2020. Back then, Christine Lagarde argued that the ECB was not there to narrow spreads, a comment that, while correct in substance, ultimately backfired.
Finally, the breaking news earlier today with the announcement of Christine Lagarde’s resignation on 7 February next year will probably also trigger questions. On paper, she is not the first ECB president to step down before the end of the official term. The first president, Wim Duisenberg, also stepped down earlier. But while Duisenberg’s decision had been part of a political deal when setting up the ECB, Christine Lagarde’s decision seems to be a personal one. With Lagarde, a very different president than her predecessors will leave the ECB. Lagarde differed in terms of style and tone, and interpreted the role of ECB president more as a moderator and chairperson of the entire Governing Council, rather than a thought leader.
With Lagarde and Isabel Schnabel, two of the six ECB’s Executive Board members will now leave before their respective ends of their terms in office. Some have argued that this might leave some bruises on the ECB as an institution, but we think that the ECB’s reputation is stronger and more stable than that. In the race for succession, the ball is now with European government leaders to now decide on a package deal, Lagarde, Schnabel and also Lane, probably at the European Council meeting in December. Currently, the two main contenders for Lagarde’s succession are Pablo Hernández de Cos from Spain and Klaas Knot from the Netherlands. Both excellent candidates who would bring a high level of monetary policy expertise to the table.
