- The ECB kept policy rates unchanged at the October meeting, with the deposit rate at 2.50%, in line with consensus and market pricing.
- We expect a 25bp hike to 2.75% in December, which Lagarde clearly signalled during the press conference. However, the press release had a greater dovish focus on the lack of second-round effects and stable core inflation, so we continue to see 2.75% as the terminal rate.
- Lagarde announced she would step down on 7 February 2027, ending her term ahead of time.
The ECB decided to keep its three key policy rates unchanged at the October meeting, as expected, with the deposit rate at 2.50%. The statement placed a greater focus on the lack of second-round effects from the energy shock and broadly stable underlying inflation. This was a dovish change compared to the September meeting, where ECB was more focused on headline inflation and energy costs. At the same time, they noted that tighter financial conditions are likely to weigh on growth and inflation. Hence, the wording was more cautious and less hawkish, which does not suggest the ECB is preparing for a forceful tightening cycle, but rather the “measured” response.
During the press conference, however, Lagarde said that they discussed a hike today, but decided to wait for more data, which they will have in December. If the upcoming data confirms what they see now and there are no major new developments, “the direction is quite clear”, according to Lagarde. We view this as clear guidance for a hike in December, although it might not be representative of the entire GC given the more dovish press statement.
Lagarde refrained from commenting too explicitly on developments in France but more broadly mentioned challenges for high-debt countries. As expected, she noted that the ECB has the tools to address transmission disruptions if they occur and that the criteria and conditions under which this applies are well known. For TPI that is “unwarranted and disorderly” market conditions.
We keep our call and expect the ECB to deliver a final 25bp hike in December, taking the deposit rate to a peak of 2.75%, and keep it at that level in 2027. While headline inflation has surged to 3.8% y/y, there have been almost no spillovers to core inflation from higher energy prices. At the same time, there are no indications of second-round effects through wages, so we do not expect more than one additional hike. The risks to our call are tilted to the upside given the high energy costs, low gas storage levels, and strong industrial demand from global AI investments.
Lagarde to Step Down on 7 February 2027
Hours before the press conference, President Lagarde announced she would step down early on 7 February 2027. Rumours of her early departure have been around for several months, so it was not a big surprise. During the press conference, she explained that she had made the decision because she wanted to be able to express her views on politics more freely. We do not expect her departure to lead to a significant change in the ECB’s policy stance as decisions are taken on a consensus basis and as the political deal between European member states on the three vacant seats of the ECB’s executive board will likely balance the policy views. For details, see Research Euro Area: [LINK?]ECB’s game of musical chairs[/LINK?], 25 September 2026.
