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European Central Bank President Christine Lagarde signalled that a new interest rate increase is on the table in December, pointing to rising inflation risks in the euro area. The remarks came after the ECB Governing Council kept its three main policy rates unchanged at its October meeting, in line with market expectations.

Speaking to reporters in Frankfurt, Lagarde said current conditions could have justified a hike at the meeting but that policymakers held off because financing conditions are already tightening.

Rate hike put on the table

Assessing the policy stance going forward, Lagarde said incoming data indicate the euro area economy continued to grow in the third quarter, while risks to the growth outlook remain skewed to the downside. She added that fresh increases in energy prices have hit consumer confidence and that higher financing costs are likely to weigh on growth.

Lagarde said the Governing Council discussed raising rates at the meeting but decided against it because of the tightening in financing conditions. The council agreed unanimously to hold rates steady in order to assess new data comprehensively, and whether a further step is taken in December will depend on the readings released over the next six weeks.

Absent a fundamental change in the policy landscape, the direction of rates is quite clear for everyone and fully consistent with futures market expectations, Lagarde said, adding that the bank is still in a moderate tightening phase.

Inflation risks skewed upward

Lagarde said the resilience of the services sector, artificial intelligence investment and public spending on the defence industry are supporting the outlook, while warning that high energy prices could spread permanently to other parts of the economy. Headline inflation will stay clearly above target in the coming quarters, Lagarde said, while wage growth remains moderate at between 2.5 percent and 2.8 percent.

On the indirect and second-round effects of high energy prices, Lagarde said the bank has not observed any additional second-round impact beyond what was projected in September. Lagarde also said the ECB is watching the rise in long-term bond yields and the widening of spreads in some countries, especially France, and stressed that highly indebted countries need to align their budget plans with the EU fiscal framework and take the high interest rate environment into account.

Lagarde to remain in post until February 7

Asked at the end of the meeting whether the frequent early departures of ECB Executive Board members point to a weakness in the institution's governance, Lagarde described the bank's institutional structure as "rock solid" and said business continuity is one of the ECB's most fundamental principles.

"Rest assured, I will remain focused on my job until February 7, without reservations or excuses," Lagarde said, adding that there is never a right time to leave. Lagarde said the wish is to speak and act more freely on matters beyond monetary policy, on principles felt close to the heart in Europe and around the world, and pointed to a large pool of excellent candidates. "Never worry about business continuity or decisions being put on hold. This institution is solid, strong and will remain so," Lagarde said.

Just hours before the rate decision, the ECB announced that Lagarde will leave the post on February 7, 2027. The ECB said Lagarde's term would normally expire in October 2027.

Key takeaways

• The ECB kept its three main policy rates unchanged at the October meeting, in line with market expectations.
• Lagarde said a rate increase at the meeting could have been justified but was set aside because financing conditions are tightening.
• A decision on a further step in December will depend on data released over the next six weeks.
• The ECB announced Lagarde will leave the presidency on February 7, 2027, ahead of the October 2027 expiry of the term.