The European Central Bank (ECB) kept its three key interest rates unchanged on Thursday, as rising energy prices threaten to push inflation higher and weaken economic growth, hours after President Christine Lagarde announced she would step down before the end of her term.

The decision leaves the ECB’s deposit facility rate at 2.50 per cent, its main refinancing rate at 2.65 per cent and its marginal lending facility rate at 2.90 per cent, following September’s rate increase.

The Governing Council said the energy shock, driven by the conflict in the Middle East, was creating risks in both directions for the euro area economy, with higher prices threatening to fuel inflation while tighter financing conditions could weigh on economic activity.

“Energy prices have continued to rise, posing upside risks to the inflation outlook and downside risks to the growth outlook,” the ECB said.

The bank added that the full effects of the energy shock were still unfolding, although underlying inflation had remained broadly stable and wages had not yet shown a significant response.

However, it warned that the shock’s growing magnitude and duration, together with possible indirect effects and a second round of price and wage increases, were likely to push inflation higher and reduce growth.

Financing conditions have also tightened since the Governing Council’s previous meeting, a development the ECB expects to weigh on both inflation and economic activity.

The central bank reiterated its commitment to bringing inflation to its 2 per cent medium-term target, while stressing that its decisions would depend on incoming economic and financial data.

“The Governing Council remains well positioned to navigate the current elevated uncertainty,” it said, adding that monetary policy would be assessed on a meeting-by-meeting basis.

The ECB said it would consider the inflation outlook and the risks surrounding it, developments in underlying inflation and the strength of monetary policy transmission when deciding on interest rates.

It also stressed that it was not committing to a predetermined path for interest rates, leaving open the possibility of further changes as economic conditions develop.

The bank said its asset purchase programme and pandemic emergency purchase programme portfolios were continuing to decline at a measured and predictable pace because the Eurosystem was no longer reinvesting principal payments from maturing securities.

The Governing Council also reiterated that it was prepared to adjust all instruments within its mandate to ensure inflation stabilised at its target and to preserve the smooth transmission of monetary policy.

It added that its Transmission Protection Instrument remained available to counter unwarranted and disorderly market movements that posed a serious threat to the transmission of monetary policy across euro area countries.

Lagarde to leave in February

The rate decision followed the announcement that Lagarde would leave the ECB presidency on February 7, 2027, around nine months before her term was due to expire in October of that year.

The 70-year-old former French finance minister and International Monetary Fund managing director announced her departure after months of speculation about her future, with the decision coming as Europe faces economic uncertainty and politically sensitive elections.

“I leave this institution with a sense of good work done and an ECB that is fit for the future,” Lagarde said in a short video shared on social media.

Her departure is expected to allow European Union leaders to select a successor before France’s presidential election, in which far-right candidate Marine Le Pen has been favoured by opinion polls.

A source with direct knowledge of the matter said Lagarde had decided to leave so she could weigh in on political matters in France and internationally, something she was expected to avoid while leading the ECB to protect the institution’s independence.

European Council president António Costa said the process to appoint her successor would begin immediately and proceed without delay.

Euro area saving falls

Separate ECB figures published earlier this week showed that euro area net saving declined to €868 billion in the four quarters to the second quarter of 2026, down from €895 billion in the four quarters to the previous quarter.

Net saving represented 6.7 per cent of the euro area’s net disposable income.

Net non-financial investment also fell to €599 billion, equivalent to 4.6 per cent of net disposable income, mainly because non-financial corporations reduced their net investment.

Despite the decline in saving and investment, the euro area’s net lending to the rest of the world remained broadly unchanged at €312 billion, as the two measures fell by similar amounts.

Household net lending decreased to €703 billion from €715 billion, representing 5.4 per cent of net disposable income.

By contrast, net lending by non-financial corporations increased to €127 billion from €103 billion, equivalent to 1 per cent of net disposable income.

Financial corporations moved from net borrowing of €3 billion to net lending of €9 billion, or 0.1 per cent of net disposable income.

General government net borrowing increased, making a more negative contribution to the euro area’s overall net lending position, at €528 billion, equivalent to 4 per cent of net disposable income.

The figures also showed that household debt declined relative to income, with the debt-to-income ratio falling to 80.3 per cent in the second quarter of 2026 from 80.5 per cent a year earlier.

Non-financial corporations’ consolidated debt-to-GDP ratio also edged down, reaching 66.1 per cent in the second quarter, compared with 66.4 per cent a year earlier.