Although the European Central Bank and the US Federal Reserve have kept interest rates on hold this week, the big story was Christine Lagarde's decision to step down as ECB President on February 7, 2027.

The European Central Bank (ECB) and US Federal Reserve kept interest rates on hold this week, as expected. The ECB kept its deposit rate unchanged at 2.5 per cent, and the Federal Open Market Committee (FOMC) held the Fed funds target range unchanged at 3.75 per cent to 4.00 per cent.

But the bigger story was ECB president Christine Lagarde's decision to step down on February 7, ahead of the French elections.

“By stepping down before the French presidential election, her departure means its winner will have no role in choosing the next ECB president – particularly significant given the political and fiscal uncertainty surrounding France,” Felix Feather, economist at Aberdeen Investments, said. “We don’t expect the change at the top to alter the near-term rate outlook, but markets will be watching the succession closely as pressure on French government debt persists, as different candidates have different attitudes to non-standard policy tools such as the transmission protection instrument. We expect further hikes in December and March.”

“Her successor is going to step into an environment where rate hikes are expected throughout next year, although they note that energy prices pose an upside risk to inflation as well as a downside risk to growth,” Neil Birrell, CIO of Premier Miton, added. “That’s a tough backdrop for the new head of the ECB to walk into; staying on the curve rather than being behind, or ahead of it, is going to be quite a trick to pull off."

Lale Akoner, global market strategist for etoro, believes that Lagarde’s departure adds uncertainty at an awkward moment, with inflation elevated and French bonds under pressure. “However, the muted initial market reaction suggests investors expect policy continuity rather than an abrupt change in direction.,” Akoner said.

"For investors, the bigger risk is that French borrowing costs rise further and spill into bank and corporate funding, weakening growth and equities. A credible appointment could reassure markets, but cannot repair France’s public finances,” Akoner continued. He likes European companies with strong cash generation and manageable debt. “French bonds could become attractive, but higher yields need credible fiscal progress alongside a dependable ECB framework.” 

With the search now begun for President Lagarde's replacement, Conor Parle, eurozone economist at Fidelity International, noted: “Her early departure starts discussions to replace not just her role, but the board positions of Isabel Schnabel and Philip Lane. The frontrunners for president at this time – Pablo Hernandez De Cos and Klaas Knot – would both likely bring continuity to the presidency and are seen as credible voices in the world of economics and central banking. In the event of the appointment of De Cos or Knot, German and French policymakers are likely to take up the remaining positions on the board."

“The ECB is balancing competing forces,” Bénédicte Kukla, chief strategist at Indosuez Wealth Management, said. “Sticky energy inflation and a possible rebound in food prices, with euro-area inflation expected next week to exceed 4 per cent year-on-year in October and core inflation (excluding food and energy prices) remaining broadly stable, but also above target at around 2.5 per cent. Conversely, tighter financing conditions, as depicted in both European bond markets and the last ECB bank lending survey, warrant a more dovish approach.”

Daniele Antonucci, chief investment officer at Quintet Private Bank (parent company of Brown Shipley) believes the Fed’s decision to stay on hold was no surprise. “We think one more rate increase is likely in December, but this looks like a limited adjustment rather than the start of another major tightening cycle,” he said

Noting that the Federal Open Market Committee (FOMC) held the Fed funds target range unchanged at 3.75 per cent to 4.00 per cent, in line with expectations, Jon Butcher, senior US economist, at Aberdeen, said: “Overall, the decision to hold seems to be a short pause to assess ahead of a likely policy hike in December, rather than an indication that no further tightening is needed.

“Warsh also announced a change in the FOMC calendar, shifting from eight to six policy decisions a year from 2028, and dedicating the other two to big picture, strategic, and framework discussions. We continue to expect further Fed hikes in December and March. The Fed has more work to do to demonstrate its commitment to return inflation to the 2 per cent target. But we still do not see sufficient evidence in the inflation data that a prolonged hiking cycle is needed,” Butcher said.