ECB holds rates as Lagarde exit compounds alarm over oil, France

THE European Central Bank kept interest rates unchanged as news that President Christine Lagarde will step down early added to concern over energy costs and France.

The deposit rate was left at 2.5 per cent, as predicted by almost all economists surveyed by Bloomberg. The announcement arrived just hours after Lagarde said she will leave in February, months before her term ends, to have more freedom to speak out on issues including the turmoil in her homeland.

“The increased magnitude and duration of the energy shock, as well as the implications for indirect and second-round effects, are likely to drive up inflation and lower growth,” the ECB said, once again declining to pre-commit to future steps.

“Financing conditions have tightened since the governing council’s last meeting, which is likely to weigh on inflation and growth.”

Lagarde’s exit is overshadowing proceedings on Thursday (Oct 29), igniting a race between the former central-bank chiefs of Spain and the Netherlands to succeed her in overseeing monetary policy for the eurozone.

On borrowing costs, the ECB is biding its time, having hiked twice since the Iran war jolted energy markets. Officials, while worried inflation is headed for double the 2 per cent goal, are not seeing signs of the ramp-up in oil and gas spreading elsewhere.

Still, surprisingly resilient European growth is waning.

“While the full effects of the energy shock are still unfolding, underlying inflation has remained broadly stable so far and wages do not show a material response at this stage,” the ECB said.

Lagarde will hold a news conference at 2.45 pm in Frankfurt. Aside from her future, she will be asked about the path for rates, rising global bond yields and the effect of the market, budgetary and political tensions gripping France.

SEE ALSO

Euro stable against greenback ahead of ECB decision; investors adjust Fed view

ECB president Christine Lagarde resigns at time of mounting challenges for Europe

Traders slightly pared bets on further ECB rate hikes, pricing 70 basis points of tightening by the end of 2027, compared with 72 basis points before. The euro extended losses, falling to a fresh 17-month low at US$1.1111.

The ECB joins the Federal Reserve in holding rates steady this week, with the Bank of Japan expected to follow suit on Friday.

Policymakers in Frankfurt are widely expected to raise again in December, when updated economic projections will show how severe inflation pressure is. Tighter financing conditions, exacerbated by France, are damping demand.

Analysts reckon the year-end increase in rates will be the ECB’s last of this cycle.

Investors are betting on more, however, focusing on the renewed advance in oil, which has jumped by more than 6 per cent since the ECB last set rates. Natural gas, meanwhile, hit its highest level in almost four years.

The renewed rally in energy helped drive consumer prices up 3.8 per cent in September, with gauges of inflation expectations also creeping higher. The economy may be starting to feel the pinch: Business momentum and morale are faltering.

Third-quarter growth probably slowed to 0.2 per cent, according to a Bloomberg poll of analysts before Eurostat publishes data on Friday.

Rate increases contributed to a fall in demand for loans during that period, while banks wary of growing risks have continued to tighten credit standards. BLOOMBERG