Christine Lagarde leaves the European Central Bank (ECB) prematurely because she no longer wants to remain silent.
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The president of the ECB, who will leave office on February 7, 2027, around nine months before the end of her mandate, said Thursday that the neutrality expected of central bankers, which she describes as “the price of their independence”, was no longer something she could accept.
“I don’t think I can remain neutral,” she told reporters in Frankfurt.
“I am interested in the truth, and I see that it is very often damaged, contradicted by false statements,” she added.
That wasn’t the only surprise of the afternoon.
Moments after the ECB left its key rates unchanged, with the deposit rate at 2.5%, Lagarde revealed that policymakers had seriously debated raising them.
The decision to hold was unanimous, she said. But his message to markets was that the pause might only last until December.
Why did the ECB almost raise its rates?
Two things have changed since the ECB’s last forecast in September, Lagarde explained.
The first is energy.
Prices of gasoline, diesel and gas have continued to rise and refining margins remain high. Inflation in the eurozone reached 3.8% in September, as energy prices rose 18.9% from a year earlier.
The second is the cost of long-term borrowing.
Lagarde said the average yield on 10-year government bonds in the euro zone had risen by around 35 basis points since the September projection deadline.
This increase is important because it does part of the central bank’s work for it. When governments and businesses pay more to borrow over ten years, mortgages and business loans also become more expensive and spending slows. Mortgage rates have already climbed to 3.8% in August from 3.5% in July, while banks tightened business lending standards in the third quarter.
“If you combine these two factors, in fact the Governing Council debated whether there should be an increase,” Lagarde said.
Ultimately, the board judged that it was “well enough placed at this stage to hold”, and that a “measured approach” remained appropriate.
Is an increase in December now envisaged?
Lagarde repeated the ECB’s usual line that it decides “meeting by meeting” and does not commit to any path in advance.
But she went further than usual.
She listed data the bank will receive before its December meeting, from two additional inflation figures to third-quarter growth and wages figures, and said those figures would be compared to today’s assessment.
“Barring any major developments, the direction forward is very clear to all of us,” she said.
She added that core inflation, which excludes volatile items such as energy and food, would carry particular weight.
What does Lagarde say about rising French bond yields?
France was the elephant in the room.
The country’s 10-year borrowing costs rose above 5% last week for the first time since 2002, and the gap with German Bund yields widened sharply.
On Thursday afternoon, the French 10-year yield eased to around 4.88%, down around 3.5 basis points on the day. That still leaves it about 154 basis points above that of Germany and about 40 basis points above that of Italy, a country long considered the weakest link in the euro zone when it comes to public debt.
Yet Lagarde avoided explicitly naming France.
She said the rise in long-term yields was global, driven by inflation expectations, expected changes in interest rates and the wave of bonds issued by big tech companies borrowing to build data centers.
But she made clear that highly indebted countries face a particular challenge.
They must plan for interest rates that “are likely to remain higher for some time,” she said, and keep their budgets within European fiscal rules.
When asked whether the ECB was monitoring the risk of contagion to other countries, Lagarde adopted a firmer tone.
“If market developments threaten the proper transmission of our monetary policy, in particular through unjustified and disorderly market movements, we have instruments to respond,” she declared.
In other words, the ECB is ready to intervene if turmoil in government bond markets becomes severe enough to prevent its interest rate decisions from reaching households and businesses as intended.
When another journalist raises the prospect of a new euro crisis, she does not engage in the comparison. “There will obviously be developments, but that’s not going to deter us,” she said.
The ECB has already intervened by buying up the bonds of troubled eurozone countries during the debt crisis that began in 2010 and again during the pandemic, while its 2022 transmission protection instrument was never used.
Oxford Economics does not expect it to be activated anytime soon.
Its reference scenario predicts that the Franco-German gap will approach 200 basis points by the presidential election next spring. Leo Barincou, senior economist at the research firm, said in a note that there was “probably some margin” between this scenario “and a full-blown debt crisis.”
What’s next?
Lagarde said her mandate would have ended in October 2027 anyway.
Her departure in February, she explained, gives her back the freedom to speak and act on issues beyond monetary policy.
After more than 20 years at the IMF and ECB, she added, there were things she felt she needed to say. “Whether people listen or not is another story.”
She declined to say whether she would support a candidate in next spring’s French presidential election, or what position she would hold next.
Regarding succession, she insisted on “perfect continuity of activities”.
“The institution is solid, strong as a rock,” she said.
Not everyone is so relaxed about the timing.
“The timing for the ECB is far from ideal,” Matthew Ryan, head of market strategy at financial services firm Ebury, said in an emailed comment, pointing to inflation well above target and a Franco-German gap at its widest since 2011.
Ryan considers former Dutch central bank chief Klaas Knot and Bank for International Settlements head Pablo Hernández de Cos to be favorites.
“The Bank has decided to leave it alone for the moment, but a quarter point hike looks increasingly likely at the December meeting,” Joe Nellis, head of economic research at accounting and consultancy firm MHA.
Lagarde will chair two more ECB meetings, in December and February. The first could well lead to the increase that the bank discussed this week.
What happens next is much less clear, as no one yet knows who will take over after he leaves.
Until a name is revealed, this uncertainty will also weigh on the markets. Investors “will now partly act on rumors about the ECB’s new leadership next year, alongside economic data,” Claus Vistesen of Pantheon Macroenomics said in a note.
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