Lagarde’s early exit and French bond sell-off keep euro-area yields elevated even as the central bank pauses.
MoneyTurkey Bonds Desk | 3 November 2026
Key points
- The ECB left its deposit rate at 2.5% on Thursday, citing upside risks to inflation from energy prices.
- French 10-year yields reached around 5%, with the spread over German debt at roughly 155 basis points.
The European Central Bank kept its deposit rate at 2.5% on Thursday, hours after President Christine Lagarde said she would step down next February. The pause follows two hikes this year and comes as inflation stands at 3.8%, nearly double the 2% target. A sell-off in French government bonds has pushed euro-area borrowing costs higher, with the 10-year yield at around 5%.
What happened
The Governing Council left the deposit rate, main refinancing rate and marginal lending rate unchanged at 2.5%, 2.65% and 2.90% respectively. The decision follows the September hike and was widely expected after inflation rose to 3.8% in September from 3.2% in August. Lagarde announced her departure on 7 February 2027, nine months before her term ends, triggering a nomination process that closes on 6 November.
The ECB statement noted that energy prices linked to the Iran war have continued to rise, posing upside risks to inflation and downside risks to growth. Underlying inflation has remained broadly stable and wages have not shown a material response so far. Financing conditions have tightened since the last meeting, which the bank said is likely to weigh on both inflation and growth.
What is moving yields
French 10-year borrowing costs climbed above 5% last week for the first time since 2002 and stood at around 5% on Thursday, with the spread over German debt at roughly 155 basis points. Moody’s kept France’s Aa3 rating unchanged last Friday but assigned a negative outlook. A divided parliament is struggling to pass next year’s budget.
Dutch bank ING estimated that the rise in bond yields since September had done the work of a 25 basis point hike in Germany and closer to 50 basis points in France. The ECB repeated that it was not pre-committing to a particular rate path, leaving markets to price the impact of fiscal supply and political risk.
Why it matters
The pause keeps the euro-area policy rate higher for longer while the bond market tightens financial conditions on its own. Lagarde will chair two more rate-setting meetings in December and February before her exit, and the race to replace her has begun with Spain’s Pablo Hernández de Cos and the Netherlands’ Klaas Knot seen as frontrunners. Two other Executive Board seats, including chief economist Philip Lane’s, also open in the first half of next year.
The combination of elevated energy-driven inflation, French fiscal stress and an early leadership change leaves euro-area yields sensitive to supply and political headlines. Markets will watch the 9 November Eurogroup meeting for the shortlist and the December ECB meeting for any shift in forward guidance.
What to watch
- 6 November: deadline for ECB president nominations
- 9 November: Eurogroup reviews candidates
- December ECB meeting: next policy decision
- French budget vote and Moody’s outlook review
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