Investing.com - The European Central Bank left interest rates unchanged as expected on Thursday as policymakers looked to corral increasing energy-fueled inflationary pressures, while the future leadership of the ECB remains uncertain following the announcement of President Christine Lagarde's impending departure next year.
In a statement, the ECB kept its key deposit facility at 2.5%, noting that "energy prices have continued to rise, posing upside risks to the inflation outlook and downside risks to the growth outlook."
The move to stand pat on rates mirrored that of the Federal Reserve on Wednesday. Like the Fed, investors are widely betting that the ECB will next lift rates in December.
However, officials flagged that full effects of the energy shock are still unfolding and underlying price gains have been "broadly stable so far." The ECB added that financing conditions have also tightened since its last meeting.
Government bond yields have surged in recent weeks, especially in France, where investors have balked at social unrest and a precarious national fiscal position. This, in turn, is likely to weigh on inflation and growth, the ECB said.
"While the ECB's decision to leave its key policy rate unchanged today was no surprise, its policy statement looks at first sight slightly dovish. We continue to think the Bank will hike only once more in this cycle, in December," said Andrew Kenningham, Chief Europe Economist at Capital Economics, in a note.
Lagarde to depart
Prior to the decision, the ECB announced that President Christine Lagarde will step down next year. When she departs in February, Lagarde will have served at the helm of the central bank for a little over seven years. Her mandated term was due to last for eight years.
Speculation around Lagarde's future had been growing, with media reports suggesting that the long-time central banker could be appointed as the next chair of the World Economic Forum. She has also hinted at taking a role in the upcoming French elections, although she has not declared herself as a candidate.
Speaking in a press conference, Lagarde said she told colleagues that her decision to leave before her term ends in October 2027 was driven by her desire to be able to "have the freedom of speech, the freedom of expression, and the freedom to engage on matters that are not monetary policy matters." As an ECB official, Lagarde argued that she was under an obligation to stay neutral on a range of topics and focus on monetary policy.
"At this time, in relation to many corners of the world, not just European corners, not just Europe, I think that my voice can help, my action can help in relation to principles that are dear to my heart," she said. "I don't think that I can remain neutral; I don't think that I can be comfortable in that neutrality at the present time."
Regardless of her future destination, the ECB will be faced with finding a candidate ready to tackle challenges like sticky inflation and bond market volatility. The European Council has said it will immediately start the search for Lagarde's successor. Media reports have suggested that the next president, along with two picks for other vacancies opening on the ECB's board, could be revealed at the December meeting.
Lagarde stressed that while "there is never a good time to leave," she will continue to concentrate on leading the ECB and push to bring inflation back down to the central bank's 2% target level.
"You can rest assured that until February 7, I'm in charge, I'm focused, and I will be working, without any reservation and without any excuses," Lagarde said.
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