ECB Expected to Hold Deposit Rate at 2.5% as Lagarde Faces French Bond Stress

The European Central Bank is expected to keep its deposit rate at 2.5% at its policy meeting on Thursday 29 October, according to all but one economist in a Bloomberg survey. Analysts in the same survey predict a third and final hike in December.

The ECB rate decision matters for investors because Frankfurt is balancing an energy-driven inflation spike against turmoil in French government bonds. President Christine Lagarde will also face questions at her press conference on her own future, as rumours about an early departure from the top job persist.

What happened

The ECB heads into the 29 October meeting with its deposit facility rate at 2.5%, after its latest increase lifted it from 2.25%. That move, a quarter-point rise, was the second hike since 11 June, when the central bank moved for the first time in three years. The main refinancing rate was lifted to 2.65% and the marginal lending facility to 2.9%.

Earlier in 2026 the picture was different. On 19 March the ECB kept the deposit rate at 2%, with the main refinancing rate at 2.15% and marginal lending at 2.40%, as it watched the effects of the war in the Middle East.

On the morning of 29 October, eurozone government bond yields fell at the open, tracking their US peers, as markets prepared for the decision, and the 10-year French OAT outperformed. Treasury yields also dropped in Asian trade after the Federal Reserve's rate decision, with attention shifting to Frankfurt.

Key figures going into the meeting

• Deposit facility rate: 2.5%, up from 2.25% at the latest hike.
• Main refinancing rate: 2.65%; marginal lending facility: 2.9%.
• ECB staff projections: headline inflation averaging 3% this year, 2.5% in 2027 and 2.1% in 2028, the latter two revised up from June.
• French-German 10-year yield spread: more than 170 basis points, according to a report on the French debt crisis.

Why is the ECB weighing an energy shock?

The ECB's inflation problem is mainly one of energy rather than demand. After the latest hike, the central bank said in its statement that "the conflict in the Middle East continues to generate inflation pressures, and inflation is set to remain well above target for an extended period."

At the time of that decision, the August inflation reading stood at 3.3%, up from 2.9% in July and the highest since September 2023. Energy inflation jumped to 14.3% from 10.3% as fighting around the Strait of Hormuz kept crude supply constrained. Brent crude (COMMODITY:BRENT) was reported to have crossed $100 a barrel again amid renewed exchanges of fire between the US and Iran.

Underneath, core inflation fell to 2.4% from 2.5% in August, and services inflation dropped to 3% from 3.3%. In a paper published by its economists, the ECB found that adverse energy supply factors accounted for around 90% of the rise in energy inflation between January and May. "This time the energy supply shock dominates, while demand and public policy stimulus have minor roles," the economists wrote.

How are French bonds and the euro area in play?

French government bonds are the second pressure point. The spread between French and German 10-year yields, a closely watched metric of distress, reached more than 170 basis points, according to a report on whether the turmoil could spread across the euro zone. European government bond yields had also surged to 15-year highs, a move the September staff projections did not capture because their cut-off fell roughly two weeks before that meeting.

A single policy rate covers very different economies. In August, inflation ran at 4.5% in Spain, 2.9% in Germany and 2.7% in France, three economies facing the same energy shock with different outcomes. Even at 2.5%, the deposit rate remains within the range the ECB considers neutral, so further tightening would mean deciding that policy must actively restrain the economy.

Elsewhere in euro-area debt, the 10-year Italian BTP yield closed at 4.07% on 18 August, near its 2026 highs, in a session of broad government bond selling across Europe, the US and Japan driven by inflation fears tied to oil prices.

What is the debate over Lagarde's future?

Christine Lagarde's possible early departure is the third theme for the press conference.

On 3 July, Lagarde said an early departure from the ECB was "possible", as France's 2027 presidential election looms, and that she might speak with candidates about France's role in Europe. Asked whether that meant October 2027, she replied: "We'll see." Another report, however, said she had stated that an early departure was not currently an option during the euro-zone turmoil, so the signals are mixed.

Why it matters

The ECB's decision matters because it shows how a central bank handles an energy supply shock without a demand boom. Economists in a Bloomberg survey expect a final hike in December, though one headline from the same service described a split between economists, who see rates held until 2028, and market pricing. Investors, according to an August report, were betting on two to three hikes this year.

For the euro, EUR/USD (EURUSD) is exposed to both the rate path and the French spread, although the sources provide no move for the pair on 29 October. For sovereign bonds, the outperformance of the French 10-year OAT at the open is a small sign of calm before the meeting.

Risks and counterpoints

The main risk is that energy costs spill into the wider economy. The ECB has said there is little sign of that so far, and Lagarde said in July that "the burden of proof is on data" and that "the full inflationary impact of the energy shock has yet to play out."

A second risk is political. A French fiscal or electoral shock could widen spreads and complicate a single monetary policy. A third is Lagarde's own succession, which analysts say needs careful planning to limit market risk.

What to watch next

The next steps are the decision itself and the press conference, followed by December.

• 29 October: ECB decision, with the deposit rate expected at 2.5%, and Lagarde's press conference on France, energy and her future.
• December: the meeting where analysts in the Bloomberg survey predict a third and final hike.
• Brent crude: whether it stays above $100 a barrel as US-Iran exchanges continue.
• French-German spread: whether it holds above 170 basis points.
• 2027: the French presidential election, which Lagarde has linked to her timing.