Uitstel, maar geen afstel van ECB-renteverhoging

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Not surprisingly, ECB President Lagarde indicated during her press conference that higher energy prices since September have been causing upward inflationary pressures and risks. By contrast, underlying inflation, one of the three pillars of the ECB's reaction function, which is measured, among other things, by core inflation, has remained broadly unchanged in recent months. Lagarde indicated that this pillar of the reaction function will receive particular attention and weight in the ECB's upcoming policy decisions.

In the short term, the ECB sees economic growth in the eurozone supported by a recovery in the services sector, AI-related investments and growth in public defence spending.

Danger of second-round effects lurking

In contrast to earlier press conferences, Lagarde referred more explicitly to the risks of second-round effects on inflation expectations for the eurozone. On the one hand, the ECB does not currently see a stronger pass-through of realised inflation to inflation expectations than at the cut-off moment for the ECB September projections, in other words no 'material risks' of increasing second-round effects yet. On the other hand, the ECB does see greater risks there as the energy price shock turns out to be stronger and more persistent.

'Non-hiking' decision

The debate at the policy meeting had a clear topic: is it appropriate to raise interest rates again at the current policy meeting? The question alone gave an indication of the direction in which interest rate policy is heading. In the end, it was unanimously decided that the ECB’s interest rate policy is still well enough positioned to wait for the additional economic data that will become available in the next six weeks, such as growth in the third quarter, the next inflation reports and confidence indicators. According to Lagarde's own words, without significant new developments, the 'direction of travel' (read higher policy rates) is clear. In that sense, Lagarde called the policy decision a "non-hike" of the policy rate. A rate hike of 25 basis points to 2.75% in December is also in line with the scenario of KBC Economics.

TPI (only) as the ultimate backstop, but not unconditionally

In a reference to the current problems regarding European public finances and government bond yields, Lagarde emphasized the importance of healthy public finances. In doing so, she made a link between the sustainability of the path of public debt and the macro-financial stability of the eurozone.

After all, European governments have been confronted with significantly higher long-term bond yields since the beginning of this year. These nominal increases are partly a result of higher inflation and higher policy rates, but also of stronger AI-related debt issuance, according to Lagarde. This particularly affects governments with a relatively high debt ratio. If this were to lead to a deterioration of smooth monetary transmission and an unwarranted and disorderly development in one or more European bond markets, Lagarde reiterated that the ECB has the appropriate tools to respond. She was referring to the TPI, which was created especially for this purpose. However, Lagarde also explicitly referred to the associated conditions for the budgetary authorities, probably to avoid that the ECB can too easily be put under pressure to come to the aid of the fiscal policy makers concerned.

Tighter financial conditions

According to Lagarde, the global rise in benchmark bond yields (in the US, Japan and Germany), combined with fiscal uncertainty and thus higher intra-EMU interest rate spreads, has led to a tightening of the financial conditions in the euro area. This tightening is also reflected in the correction in equity markets, the increase in market-based financing costs for corporates, and the results of the ECB's latest Bank Lending Survey (BLS) for the euro area for the third quarter. The BLS showed that the demand for corporate loans decreased as a result of higher interest rates, while the credit conditions set by the banks (the supply side of the credits) became stricter as a result of the large risks related to the credit applicants. On top of that, there was a decreased risk tolerance of the banks.

Upcoming appointment at the ECB top

Finally, Lagarde also announced her resignation as ECB president on Thursday with effect after the February 2027 policy meeting. In any case, her regular eight-year term would expire in October 2027. The reason for her resignation was that she wanted to get more involved in the public debate, which she would not be able to do in her current position due to the ECB's neutrality requirement. Somewhat cryptically, she stated that she did not want to remain 'neutral' in a political context where reality is sometimes misrepresented.

The timing of the French presidential election in April and May 2027 probably plays a role in her early dismissal. The final result is likely to mean that the appointment of her successor, the one of Isabel Schnabel (who will join the IMF in January) and of Philip Lane (whose term expires in May 2027) will lead to a political appointment ‘package’ in the European Council. Often-mentioned candidates as Lagarde's successor are the former chairman of the Dutch central bank Klaas Knot, and the former chairman of the Spanish central bank Pablo Hernández de Cos.