European Central Bank boss resigns early to allow search for successor to begin

The European Central Bank left its benchmark interest rate unchanged at 2.5 per cent on Thursday, but the decision was completely overshadowed by news that its president, Christine Lagarde, is set to resign nine months early.

Lagarde, who is 70, will step down on 7 February, the ECB said, even though her eight-year term was previously due to run until 31 October 2027.

The ECB president chairs the bank's governing council, the body that sets interest rates for the 21 countries using the euro.

Those rates shape borrowing costs for everything from house purchases to new factories, and the bank acts as the European Union's chief crisis fighter in times of economic and financial turbulence.

Lagarde’s early departure clears the path for European leaders to pick a successor before France's presidential election next year.

“It has been a great pride and a huge privilege to serve this institution,” Lagarde said in a video message posted on X.

“I think that I leave this institution with a sense of good work done and an ECB that is fit for the future.”

The announcement had been anticipated after speculation that Lagarde would go early so that EU leaders could choose a successor while pro-EU French President Emmanuel Macron remains in office.

An early choice would guard against the possibility that right-wing presidential candidate Marine Le Pen might win the election and influence the decision.

“That she leaves early is no surprise and does not change the outlook for ECB policies,” said Holger Schmieding, chief economist at Berenberg bank.

Macron added that he expressed his deep gratitude to Lagarde for her action during her time at the ECB.

France’s right-wing was less pleased by the move.

"I saw this coming. Another insult in our direction – lamentable," he said.

A German member of the European parliament for the centre-right European People's Party, Markus Ferber, said Lagarde's premature resignation would send "the wrong signal" given high inflation, nervous bond markets and looming elections.

"If the impression arises that such a departure is timed around national elections, it damages trust in an institution that must stand above any domestic political calculation," Ferber, who sits on the parliamentary committee that will confirm Lagarde's successor, said.

"By leaving office early, Christine Lagarde gives European governments and institutions an opportunity to appoint a successor who will safeguard European values and protect the ECB's independence," he said.

European Council President Antonio Costa said that the selection process “will be initiated today and will proceed without delay.”

The terms of two other departing officials would also be adding to the workload.

Chief economist Philip Lane's term ends on 31 May, while Isabel Schnabel, another member of the ECB's executive board, is resigning on 3 January to move to the International Monetary Fund.

European leaders were expected to assemble a package deal dividing the three vacancies among member countries in a complex round of political bargaining.

Schmieding said EU leaders would likely seek agreement on all three posts before a summit meeting on 17-18 December.

The leading candidates for Lagarde's job appeared to be former Netherlands central bank head Klaas Knot and Spain's Pablo Hernandez de Cos, the general manager of the Bank for International Settlements, an international organisation of central banks, he said.

“The European Union is trying to guard itself at least somewhat against the risk that right-wing Marine Le Pen may win the French presidential election in April-May 2027,” Schmieding wrote in an email. “Lagarde’s successor will still be appointed while the staunchly pro-European centrist Emmanuel Macron still resides in the Elysee Palace.”

Lagarde, the former head of the International Monetary Fund, was appointed in 2011 to succeed Mario Draghi.

A key decision of her tenure came in 2020, when the bank deployed 1.35 trillion euros (£1.13 trillion) in emergency stimulus through bond purchases to keep the Covid-19 pandemic from drying up credit for the economy.

The bank's capacity to act swiftly, in contrast to the often drawn-out negotiations among the 27 European Union national governments, has given it a leading role in fighting Europe-wide crises such as the pandemic and the peak of the eurozone's debt crisis in 2010-2012.

Most notably, Draghi's promise in 2012 to “do whatever it takes to preserve the euro” calmed bond market turmoil that had raised fears the eurozone would break up.

On rates, the bank held steady despite annual inflation of 3.8 per cent, fed by high oil prices caused by the US-Iran war.

Money markets were currently pricing in another three rate increases from the ECB by the end of next year, which would take the deposit rate to 3.25 per cent, a level that is widely seen as restricting economic growth.