Yesterday, in line with expectations, the ECB kept key interest rates unchanged, with the deposit facility rate at 2.5% following the June and September hikes. Furthermore, the statement noted that the scale and duration of the energy shock (crude oil, and especially gas and distillates), along with its indirect and second-round effects (which are currently not evident, given stable wage growth), will likely push inflation higher and weigh on economic growth, compounded by tighter financing conditions (rising yields). The latest Eurozone CPI reading stands at 3.8%, with additional upward pressure.
The ECB maintains its data-dependent approach without committing to future rate moves, although the market continues to price in a high probability of a +25 bps hike at the December 17 meeting (c. 80% probability). This remains fully dependent on energy cost developments, potential second-round inflation effects, and the situation in France (where rising bond yields are effectively doing part of the ECB’s tightening work). We also note that the updated macroeconomic projections for GDP and inflation will be presented at the final meeting of the year. The nearly two additional rate hikes currently priced in by the market for 2027, reaching 3%–3.25%, seem excessive to us given the risks to growth and the ongoing situation in France.
Compounding this environment, the leadership succession introduces further uncertainty regarding the policy stance after February. In this context, Lagarde confirmed she will step down as ECB President on February 7, 2027 (ahead of her mandate’s official end in October 2027). An effort will be made to agree on a successor before the end of the year. The front-runners appear to be Spain’s Pablo Hernández de Cos (former Governor of the Bank of Spain, currently leading the BIS), who leans more “dovish,” against the Netherlands’ Klaas Knot (former President of the Dutch Central Bank), known for a more “hawkish” stance—though he has recently softened his posture slightly, stating that the ECB might need a policy with a “slight bias toward monetary tightening.” Working against Knot is the fact that the Netherlands previously held the presidency under Wim Duisenberg. We also recall that vacancies left by Philip Lane (Chief Economist) and Isabel Schnabel (Executive Board member) will need to be filled, making a balanced distribution of roles among different European nations the most logical outcome.
