ECB Keeps Interest Rates on Hold
29th October 2026
Today, in a well telegraphed move, the European Central Bank (ECB) left interest rates unchanged, but the big news was the announcement that the President of the ECB, Christine Lagarde, has resigned and will leave her post on 7th February 2027, eight months before the expiry of her term. Today’s interest rate decision by the governing body was passed unanimously, leaving its Key Benchmark Deposit Rate Facility rate on hold at 2.50%, with the main financing operations rate and the marginal facility also held steady at 2.90% and 2.65% respectively*.
*ECB Interest Rates – The ECB has three interest rates; the Key Deposit Rate is the interest rate banks receive when they deposit money overnight with the ECB. The other two facilities are the Main Refinancing Operations, which is the rate the banks pay when they borrow money from the ECB for one week, and the Marginal Lending Facility is the rate banks pay when they borrow money overnight from the ECB.
In a post-meeting statement, ECB officials said, “The increased magnitude and duration of the energy shock, as well as implications for indirect and second round effects*, are likely to drive up inflation and lower growth. Financing conditions have tightened since the Governing Council’s last meeting, which is likely to weigh on inflation and growth”. The annual headline inflation rate within the eurozone accelerated for a third consecutive month to 3.80% in September (up 3.20% from the previous month), which is the highest since September 2023 and heading towards double the ECB inflation target of 2.00%.
*Second Round Effects – In these scenarios, second round effects are price and wage-settings stemming from the current shock that have the potential to raise Eurozone inflation beyond the near-term in a persistent manner.
Data released for underlying/core inflation (excludes volatility items such as food, energy, alcohol and tobacco) in the eurozone for September reflected a figure of 2.50%, up 0.10% from the previous month. ECB officials noted that, “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”. However, analysts point out that rising oil and gas prices will place negative pressure on inflation, and with the winter months just around the corner, consumer demand will be increasing along with increasing energy prices.
Christine Lagarde has announced she will leave the ECB in February next year, which has intensified the struggle to replace one of the world’s major financial and monetary policymakers. President Lagarde said, “I leave this institution with a sense of good work done, and an ECB that is fit for the future”. The two main protagonists for Lagarde’s position are the Netherlands’ Klaas Knot and Spain’s’ Pablo Hernandez de Cos, who is currently the head of the Bank for International Settlements (BIS), and the former chief of the Bank of Spain, and is currently considered by analysts to be the favourite for the job.
Speculation suggests that Christine Lagarde may well like to become the boss of the World Economic Forum which organises the annual Davos gathering, however she has indicated that she would like to play a role in the campaign for the next President of France, but rules out gunning for the top job. However, she has already incurred the wrath of the far right party with Jean-Phillipe Tanguay, who is charged with drafting the economic policy for Le Pen’s election manifesto, which said, “I saw this coming, another insult in our direction”.
Experts suggest that there will be another rate hike by the ECB at their next meeting in December, with officials prepared to hike interest rates if inflation does not improve. Financial markets have priced in an 85% chance of another 25 basis point increase before close of business 31st December 2026. Indeed, Christine Lagarde commented today post-meeting that risks to the eurozone’s growth outlook remain tilted to the downside, while risks to inflation remain tilted to the upside, suggesting a rate increase come this December.
