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ECB president Lagarde reiterates bank ready to intervene in markets if necessary
European Central Bank president Christine Lagarde is now talking about the rise in bond yields in recent weeks.
She notes that bond yields have risen around the world, partly driven by higher inflation and expectations of higher interest rates, as well as American AI companies issuing a lot of corporate debt.
We look at the entire curve. The long end of the curve across the world, not specifically for a member state, not specifically for the whole of Europe, but across the world, has risen significantly.
This is caused by expected inflation, this is caused by the expected interest rate path, and we think that the debt issuance by some of the hyperscalers [large technology companies]… increasing the volume of long-term bonds that are issued also plays a role, but that has affected the entire market.
Second observation, and that applies also to all countries: those countries with a high debt have to factor into their fiscal policy plans the fact that interest rates are higher and will probably remain higher for a period of time in Europe. If you apply that principle, what it means is that policy measures have to be adopted as part of a plan that is always submitted to Brussels, and that has to comply with the European fiscal framework.
She reiterates the central bank’s earlier statement that it stands ready to intervene in markets if necessary.
Should market development threaten the smooth transmission of our monetary policy, including through unwarranted and disorderly market movements, we have instruments available to respond, and the criteria and conditions under which this applies are well known, they are published.
Key events
Lagarde says early exit driven by desire to have ‘freedom of speech’
She is talking about her decision to step down as president next February now. She wants to be be able to speak freely on non-monetary policy matters, she explains.
There is never a good time to leave, but it’s embedded in the governance of the ECB that presidents, board members have to leave because they cannot be up for renewal. So the end of my term, in any event, would have been October 2027.
The reason I’m anticipating the end of my term by leaving in February of 2027 instead of October is, as I have said to colleagues, members of staff, and governors, because I want to have the freedom of speech, the freedom of expression, and the freedom to engage on matters that are not monetary policy matters.
As you all know, as president of the European Central Bank, and my colleagues on the executive boards and on the Governing Council are under pretty much the same constraints, we have an obligation of neutrality.
We comment on the situation with a focus on monetary policy. We are driven by one mandate, and we don’t get out of that mandate because that’s the price we pay for being independent.
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.
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, and I’m interested in the truth, and I see the truth being very ften damaged, contradicted by misrepresentation, and from the position that I have had for the last 20 plus years of my life in economic and financial matters on the international scene as managing director of the IMF, as president of the ECB, there are things that I can say. Whether people will listen or not is another story.
But I feel that I should say those things, and I cannot do so in my current position.
But don’t worry about the ECB’s continuity, she adds, describing it as a “solid” institution, a “rock”.
The ECB is going to carry on with perfect continuity of business.
A process has already started to identify my successor, there are plenty of excellent candidates, much better than me actually.
So don’t worry about continuity of business. Don’t worry about decision making in limbo. No, absolutely not.
The institution is solid, strong, like a rock, and it will continue being so.
She will be at the next press conference on 17 December.
That concludes today’s press conference.
Lagarde repeated that the central bank is “mindful” of the moves in bond markets and rising energy prices.
There clearly have been changes [in the last six months].
They are the ones that apply to all countries, the ones related to energy prices in general, the ones related to financing, and particularly the financing costs at the long end of the curve, and obviously we are mindful of all such developments.
ECB president Lagarde reiterates bank ready to intervene in markets if necessary
European Central Bank president Christine Lagarde is now talking about the rise in bond yields in recent weeks.
She notes that bond yields have risen around the world, partly driven by higher inflation and expectations of higher interest rates, as well as American AI companies issuing a lot of corporate debt.
We look at the entire curve. The long end of the curve across the world, not specifically for a member state, not specifically for the whole of Europe, but across the world, has risen significantly.
This is caused by expected inflation, this is caused by the expected interest rate path, and we think that the debt issuance by some of the hyperscalers [large technology companies]… increasing the volume of long-term bonds that are issued also plays a role, but that has affected the entire market.
Second observation, and that applies also to all countries: those countries with a high debt have to factor into their fiscal policy plans the fact that interest rates are higher and will probably remain higher for a period of time in Europe. If you apply that principle, what it means is that policy measures have to be adopted as part of a plan that is always submitted to Brussels, and that has to comply with the European fiscal framework.
She reiterates the central bank’s earlier statement that it stands ready to intervene in markets if necessary.
Should market development threaten the smooth transmission of our monetary policy, including through unwarranted and disorderly market movements, we have instruments available to respond, and the criteria and conditions under which this applies are well known, they are published.
What a day in Frankfurt, says Carsten Brzeski, global head of macro at ING.
An uneventful policy action but a very eventful day on other issues. The ECB announced that interest rates remain unchanged. The main argument behind this decision is that there are currently very little knock-on effects from higher headline inflation, while, at the same time, financing conditions, ie mainly bond yields, have become more restrictive. The breaking news, however, came just a few hours earlier: ECB president Christine Lagarde announced that she will step down on 7 February 2027.
As regards monetary policy, a pause after two rate hikes this year was expected, even if macro developments since the last meeting could have justified another rate hike. Headline inflation increased again in September and most leading indicators point to continued resilience in the eurozone economy. However, the surge in bond yields on the back of the French crisis is already imposing a new restrictive monetary policy stance. Or in other words, the bond market has taken over the ECB’s job.
As regards France, the juicy part will only follow during the press conference [this hasn’t happened yet]. Political and fiscal concerns in France, and the resulting widening in French spreads, have raised questions about whether the ECB could intervene through the Transmission Protection Instrument (TPI), which allows it to purchase securities issued by member states whose financing conditions have deteriorated for reasons not justified by country-specific fundamentals. And for countries that are compliant with the EU fiscal framework. It’s hard to argue that this is a condition France currently fulfils… we hope [the ECB] remembers the experience of March 2020. Back then, Lagarde argued that the ECB was not there to narrow spreads, a comment that, while correct in substance, ultimately backfired.
Turning to Lagarde’s departure, Brzeski said:
On paper, she is not the first ECB president to step down before the end of the official term. The first president, Wim Duisenberg, also stepped down earlier. But while Duisenberg’s decision had been part of a political deal when setting up the ECB, Christine Lagarde’s decision seems to be a personal one. With Lagarde, a very different president than her predecessors will leave the ECB. Lagarde differed in terms of style and tone, and interpreted the role of ECB president more as a moderator and chairperson of the entire Governing Council, rather than a thought leader.
With Lagarde and Isabel Schnabel, two of the six ECB’s Executive Board members will now leave before their respective ends of their terms in office. Some have argued that this might leave some bruises on the ECB as an institution, but we think that the ECB’s reputation is stronger and more stable than that. In the race for succession, the ball is now with European government leaders to now decide on a package deal, Lagarde, Schnabel and also Lane, probably at the European Council meeting in December. Currently, the two main contenders for Lagarde’s succession are Pablo Hernández de Cos from Spain and Klaas Knot from the Netherlands. Both excellent candidates who would bring a high level of monetary policy expertise to the table.
Christine Lagarde, the ECB’s president, has just started her press conference. She is reading out her prepared remarks.
The bigger news today was that she will step down in February, nine months early.
Neil Birrell, chief investment officer at Premier Miton, said:
[Lagarde’s] successor is gong to step into an environment where rate hikes are expected throughout next year, although they [the ECB] note that energy prices post an upside risk to inflation as well as downside risks to growth.
That’s a tough backdrop for the new head of the ECB to walk into.
French and other eurozone bond yields fall after ECB announcement
French and other eurozone bond yields have fallen following the ECB’s announcement, probably because the central bank said it stood ready to intervene in markets if “unwarranted, disorderly” moves pose a “serious threat” to its mandate to keep price growth stable.
The yield, or interest rate, on the 10-year French government bond fell more than 5 basis points to 4.89%. On Wednesday last week, it jumped above 5% for the first time since 2002.
The spread between French and ultra-safe German 10-year bonds fell 4.17 basis points to 151.42, after hitting a 15-year high of almost 178bps last week, when protests and riots brought chaos to a country that is grappling with high public debt levels.
The ECB said:
Moreover, the Transmission Protection Instrument (TPI) is available to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across all euro area countries, thus allowing the Governing Council to more effectively deliver on its price stability mandate.
The TPI allows the central bank to purchase securities issued by eurozone member states whose financing conditions have deteriorated for reasons not justified by the country’s fundamentals.
The euro dipped after the ECB’s announcement, falling as much as 0.4% to $1.1105, and is now down 0.17% at $1.1133.
ECB leaves interest rates unchanged
The European Central Bank has left its three key interest rates unchanged, as expected, after raising them twice since June.
It is expected to hike rates further in the coming months as policymakers seek to put a lid on rising inflation after an oil-price shock linked to the Iran war, in an effort to stop it feeding into other prices and wages.
The governing council explained in a statement:
Energy prices have continued to rise, posing upside risks to the inflation outlook and downside risks to the growth outlook. 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 at this stage. The increased magnitude and duration of the energy shock, as well as the 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 Governing Council is committed to setting monetary policy to ensure that inflation stabilises at its 2% target in the medium term.
The governing council remains well positioned to navigate the current elevated uncertainty. It will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. In particular, the governing council’s interest rate decisions will be based on its assessment of the inflation outlook and the risks surrounding it, in light of the incoming economic and financial data, as well as the dynamics of underlying inflation and the strength of monetary policy transmission. The governing council is not pre-committing to a particular rate path.
Outgoing president Christine Lagarde will give a press conference in about 25 minutes.
US economic growth picks up in third quarter
The US economy grew by 3.4% in the third quarter, more than expected, while a closely watched inflation measure slowed.
Growth picked up from an annualised growth rate of 2.2% in the previous quarter, according to an advance estimate from the US Bureau of Economic Analysis.
Economists had expected 3.2% growth.
Increases in investment, consumer spending, and government spending were partly offset by a decline in exports.
The personal consumption expenditures (PCE) price index – an inflation measure that is closely watched by the US Federal Reserve increased 2.1%, down from an increase of 5% in the prior quarter. The PCE price index excluding food and energy increased 2.5%, versus an increase of 3.3% previously.
European Central Bank president Christine Lagarde quit (effective from February) because she could no longer remain neutral about French politics and wanted greater freedom to express her views, Reuters reports, quoting an unnamed source.
France is gearing up for a presidential election next year, where far-right candidate Marine Le Pen is the favourite to win.
An ECB spokesperson declined to comment.
‘There has to be a bolder shift’: retail and hospitality businesses assess relief in budget
We heard from Premier Inn owner Whitbread this morning, which welcomed John Healey’s budget measures on business rates – they will be frozen for two years.
We have spoken to other, small business owners about what the budget means for them. My colleagues Sarah Butler and Joanna Partridge report:
“It is like letting the tyres down and then handing you a pump,” says James Nye, assessing the relief handed to businesses in Healey’s first budget as chancellor.
The managing director of Norfolk’s Anglian Country Inns argues that the budget made a “couple of steps towards helping” but added more labour costs for already burdened companies.
Nye, who employs 500 people at the height of the season at its 10 venues across Norfolk and Hertfordshire, was among those business owners watching Healey carefully on Wednesday, after two previous Labour budgets under Rachel Reeves had loaded extra costs on to businesses.
Healey aimed to help high street operators by removing the business rates burden from more small businesses and limiting the rise in the minimum wage for younger workers.
The chancellor put a lid on increases to business rates, so they will only rise in line with inflation for two years, and clamped down on VAT dodging by online sellers, among other measures intended to help high streets. However, some businesses argued Andy Burnham’s chancellor could have gone further.
Dean Richmond, the owner of the Pets Corner chain, says the chancellor has not fixed the “fundamental problem” that its costs are rising faster than it can increase sales.
Ireland’s economy grows rapidly for second quarter
Ireland’s economy grew rapidly for a second quarter, adding to hopes for continued expansion across the eurozone despite surging energy costs.
It expanded at a quarterly rate of 5.5% between July and September, down from 10.2% in the previous quarter, according to preliminary estimates.
Ireland’s statistics office said growth was driven in part by information and communications, which includes AI-related activity.
The government has long cautioned against using GDP to accurately measure economic growth as it is routinely distorted by multinational activity. Its preferred measure, modified domestic demand (MDD), is not included in the early estimates.
GDP is still used to calculate Ireland’s share of activity across the eurozone and can be subject to large revisions. GDP was 3.9% higher on a year-on-year basis in the third quarter.
Christine Lagarde, who will step down as European Central Bank president next February, nine months before her term ends, announced the decision in a short video on X – and also explained why she has plasters on her face.
I have just informed my colleagues that I will step down as @ECB President on 7 February 2027. It has been a source of great pride to serve this institution. I thank all of those who have supported me on this journey over the past seven years.
In a separate post, she added:
Just to avoid any social media chatter: the plasters on my face are due to a small surgery earlier in the week. Follow doctor’s orders and get your skin checked regularly!
Jonathan Haskel, professor of economics at Imperial Business School who bcame head of the Office for Budget Responsibility (OBR) in the summer, has explained the OBR’s verdict on the budget, speaking on BBC radio 4’s Today programme this morning.
In its response to the budget on Wednesday, the government’s independent forecaster said British households face a “grim picture” for living standards as the war in the Middle East drags down growth and triggers a fresh cost of living crisis.
As John Healey announced his first budget, the OBR issued its report showing a sharp downgrade for growth in 2027, household disposable incomes and the public finances, despite the measures taken by the chancellor.
Haskel told BBC radio 4:
Whilst the meteorological weather has been kind to us over the last summer period, the economic weather has been much less benign. And one way to think about that is that the borrowing rates which the chancellor faced have gone up very severely since we did our last forecast in March.
Now there are lots of numbers flying around, so forgive me for one more number, which is £14bn. That’s the increase in the borrowing bill just from the increase in interest rates alone that the chancellor had to find before he even stood up and did any of the types of policies which you talked about.
To give people some sense of the scale of that, that’s about a third or so of the entire Department for Transport budget. So that’s a lot in comparison to the other services.
Real household disposable income per person, the amount of money that people have got after inflation and tax bills was growing at about 2% a year before the financial crisis of 2007-8.
We’re forecasting that because of all the shocks and so forth we’ve had, that growth rate has gone right down. If you take the 10-year span from the beginning of the pandemic, that measure of income will have grown by 1% over that entire 10 years, not per year, but over that entire 10 years, and that’s a very very difficult outcome obviously for people. A reflection of the severe adverse shocks that the economy has been subject to over the last decade.
The government’s welfare bill is going up from around 10.5% of GDP to around 11.5% of GDP, Haskel said.
So that’s a big increase. What’s interesting about that increase is that I guess if we were having this conversation 20-30 years ago, we would think of welfare as primarily being payments to unemployed people, whereas it’s much more now payments on disability and payments for pensioners.
Asked about upcoming cuts to government spending, he said:
What we’ve worked out in our report is that over the last three years of our forecast, so from 2029 onwards, that’s an area where the government hasn’t yet done all the various detailed spending plans for all its individual departments. So we’ve done the following calculation: we’ve asked the question: Suppose the government carried on with its commitments to defence, which the chancellor has talked about very eloquently, with its commitments to teaching and education, with its commitments to health. What would other departments have to withstand? What would be the deal for them over the last three years? And the answer to that is a cut by around 2.6% in real terms in all of those other departments, in order to meet those commitments.
Phillip Inman
The Resolution Foundation press conference finished not long ago, and there was a distinctly gloomy air among the panellists, reports senior economics writer Phillip Inman.
The head of the Office for Budget Responsibility, Jonathan Haskel, wanted to put the budget in the context of a British economy that has been growing slowly for a long time.
The OBR report says economic growth will slow to just 1% next year under the weight of inflation and high interest rates.
Stephanie Flanders, the former BBC economics editor who now resides at Bloomberg as head of economics, said it should be the working assumption that the Iran war goes on for the rest of Donald Trump’s presidency, just as the Pentagon assumes. And even if it doesn’t, there is likely to be another geopolitical tragedy to raise prices and fuel inflation just around the corner.
Greg Thwaites, the Resolution Foundation’s interim chief economist, said there was a high degree of wishful thinking about the public finances and the government’s ability to balance the books next year and in 2028 and 2029.
He said John Healey’s plan to freeze fuel duty until the middle of next year and then increase the levy significantly in subsequent years was unrealistic. The same outlook applies to Whitehall budgets, which are on course to shrink in real terms (adjusted for inflation) from next year but provide the same level of services.
It’s like when my friends say they are going to diet next week and when that doesn’t happen say they will diet twice as hard in the following week. And that is how I feel about the budget more generally.
It’s another way of saying, maybe this time things will be different, but they weren’t this time yesterday, so why would they be in the future?
Thwaites added that the country needed to have an honest conversation about how much poorer it was after the energy shock and what level of welfare and services it could afford to provide with a smaller bag of money to do it.
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