ECB keeps rates unchanged; euro and bond yields fall

LONDON, Oct 29 (Reuters) - The European Central Bank left interest rates unchanged in a well-telegraphed move on Thursday, and said inflation risks were on the rise from surging energy costs, which could solidify market bets for a December rate hike.

Earlier on Thursday, ECB chief Christine Lagarde resigned, ending months of speculation about her future, just as Europe enters a period of rising economic volatility and divisive electoral politics, particularly in her native France.

The euro fell to its lowest since last May to last trade 0.2% lower on the day at around $1.113, while rate-sensitive two-year government bond yields fell sharply . 

Europe's broad STOXX 600 index was up 0.95%, holding higher on the day 

COMMENTS: 

 LAUREN HYSLOP, INVESTMENT MANAGER MATTIOLI WOODS, AYRSHIRE: 

"Regardless of who actually gets the job, they're all going to be slightly constrained by the fiscal situation. We've only got massive deficits across the block, and we've got higher bond yields. So that's a huge kind of struggle for the overall block."

LALE AKONER, GLOBAL MARKET STRATEGIST, ETORO, LONDON:

"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."

"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.

We favour 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."

FELIX FEATHER, ECONOMIST, ABERDEEN INVESTMENTS, LONDON

“Lagarde’s resignation is the bigger story than today’s widely expected decision to leave rates on hold. 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.

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.”

FIONA CINCOTTA, SENIOR MARKET ANALYST, CITY INDEX, LONDON:

"What we've seen here is that the ECB left rates unchanged, but it also highlighted the ongoing upside risks to inflation stemming from the energy shock. At the same time, it pointed to another force acting on inflation which is tighter financing conditions."

"The market has interpreted that as a slightly more dovish signal from the central bank, suggesting the ECB may not need to raise rates as aggressively as previously feared. That appears to be reflected in the euro's reaction, with the currency moving lower following the statement."

MARK WALL, CHIEF EUROPEAN ECONOMIST, DEUTSCHE BANK, LONDON:

“Predicting the path of ECB monetary policy is becoming more challenging. One question is whether the two hikes already delivered and the tightening of financial conditions since September are enough to lean against the further increase in energy inflation risk? Probably not. The other is whether the change of leadership at the ECB will affect decision-making next year? We think the institution is bigger than the person, but there’s uncertainty."

MARCHEL ALEXANDROVICH, EUROPEAN ECONOMIST, SALTMARSH ECONOMICS, LONDON:

"As expected, the ECB leaves rates unchanged at today’s meeting, but signals that a rate hike in December is firmly in play, citing upside risks to the inflation outlook."

"The bigger news is the confirmation that Christine Lagarde will leave her post in February, rather than in October of next year. Markets will not be surprised by the announcement, but it will bring into focus the fact that the ECB is heading for a significant reshuffle in the first half of 2027, with Isabel Schnabel, Lagarde, and Philip Lane — the ECB’s de facto chief economist — all set to depart imminently."

"We don’t expect to see a major pivot in the ECB’s thinking, or actions next year as a result of the changes, but how the new leadership communicates with the markets will obviously be crucial."

CONOR PARLE, EUROZONE ECONOMIST, FIDELITY INTERNATIONAL, LONDON:

"The ECB is continuing to signal vigilance against higher inflation and will be also comforted by what has been a resilient economy to date. That said, broad measures of financial conditions have clearly tightened so the ECB will remain vigilant to ensure that monetary policy transmission remains smooth and orderly.

"In one sense, these tighter financial conditions will do some of the lifting for the ECB - providing a headwind to inflationary pressures, but it also gives them something else to juggle, particularly if fragmentation between countries grows.

"Her (Lagarde's) 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."  

SIMON DANGOOR, DEPUTY CIO FOR FIXED INCOME, GOLDMAN SACHS ASSET MANAGEMENT: 

"The balance of risks within the ECB is shifting. Concerns about France and tighter financial conditions are increasingly offsetting unease about elevated inflation, especially with much of the recent price pressure stemming from energy costs."

ED HUTCHINGS, HEAD OF RATES, AVIVA INVESTORS, UK:

“Overall, an immediate priority for the ECB is to address the inflationary backdrop and any second-round effects that may surface. This is absolutely key, and as such, the market is likely to be correct in thinking more hikes will be coming. However, with two hikes already delivered and close to a further three hikes priced in, not to mention the growing contagion and growth risks, overweight positions in certain European bonds are looking increasingly attractive."

NEIL BIRRELL, CIO, PREMIER MITON, LONDON:

"It’s all change at the ECB with Christine Lagarde stepping down on 7 February, but no change to rates today. 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. 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."

PIOTR MATYS, SENIOR FX ANALYST, INTOUCH CAPITAL MARKETS:

“'Financing conditions have tightened since the Governing Council’s last meeting, which is likely to weigh on inflation and growth' could be a crucial sentence in the official statement published by the ECB. Some may interpret it as a signal that the bar for more rate hikes could be higher than markets assume. Let's see what Lagarde has to say at the presser." 

(Reporting by the Reuters Markets team; Compiled by Dhara Ranasinghe, edited by Amanda Cooper)