The European Central Bank kept its deposit rate at 2.50% on Thursday, but President Christine Lagarde said policymakers had debated a hike and left the door open to one in December. Hours before the decision, Lagarde said she would step down on Feb. 7, 2027, months before her term was due to end.

For investors in Asia, the decision shapes the euro's value against the yen and the yuan and the strength of European demand for the region's goods. It came in a week in which the Federal Reserve, the ECB and the Bank of Japan all held rates while leaving the door open to further increases. The ECB has already raised rates twice this year, the latest in September, as energy prices linked to the Iran war pushed euro zone inflation higher, according to Euronews.

The main refinancing rate stays at 2.65% and the marginal lending rate at 2.90%, the bank said in a statement. It will keep shrinking its bond portfolios by not reinvesting principal from maturing securities.

Why the ECB Held, and What It Means for December

The Governing Council said energy prices had kept rising, which raises the risk of higher inflation and weaker growth. Underlying inflation has stayed broadly stable and wages have not yet responded in a material way, it said, while tighter financing conditions since September are likely to weigh on both prices and output.

Lagarde told reporters that some members asked whether a hike was warranted right away, but the council decided unanimously to wait for more information. She cited two changes since September: higher prices for fuel and gas, including higher refining margins, and a rise of about 35 basis points in average 10-year government bond yields since the cutoff for the September staff projections.

Asked about December, she said that barring a major development, "the direction of travel is quite clear." She also said the bank decides meeting by meeting and is not pre-committing to a rate path. Before the Dec. 17 decision, policymakers will receive new staff projections, two inflation readings, third-quarter GDP and wage figures, and the November purchasing managers' surveys. Underlying inflation will carry particular weight, she said.

Inflation rose to 3.8% in September from 3.2% in August, the ECB said. Energy inflation jumped to 18.9% from 14.3%, and services inflation edged up to 3.2%. Unemployment held at 6.4% in August. The bank expects inflation to stay well above its 2% target over the coming quarters before easing energy prices and higher rates bring it back down.

Lagarde's Early Exit

Lagarde informed the Governing Council and European Council President António Costa of her decision on Thursday, the ECB said. The European Council will appoint her successor under the EU treaty's nomination process. Her eight-year term would otherwise have ended in October 2027.

The press release gave no reason. At the press conference, Lagarde said she was leaving early because she wants freedom of speech and expression and "the freedom to engage on matters that are not monetary policy matters." ECB policymakers have an obligation of neutrality, she said, and she cannot say those things in her current position. A process to identify her successor has already started, she said, and the institution will carry on without interruption. She said she will step down after the February policy meeting, which the ECB's calendar sets for Feb. 3 and 4.

Spain's Pablo Hernández de Cos and the Netherlands' Klaas Knot are seen as frontrunners, Euronews reported. Two other seats on the six-member Executive Board, including that of chief economist Philip Lane, also open in the first half of 2027.

Euro, Bunds and the Read-Through for Asia

The euro erased an earlier 0.4% drop that had taken it to its weakest level since May 2025 and traded slightly higher at about $1.116 after Lagarde spoke, Trading Economics reported, with markets pricing a better than 80% chance of a December hike. Germany's 10-year Bund yield fell toward 3.3%, its lowest since late August.

France remains the pressure point. Its 10-year yield stood near 5% on Thursday, about 155 basis points above Germany's, after topping 5% last week for the first time since 2002, Euronews reported. Dutch bank ING estimated that the climb in yields since September had done the work of a quarter-point hike in Germany and close to half a point in France. "The bond market has taken over the ECB's job," ING said in a note cited by Euronews.

The ECB's statement repeated that its Transmission Protection Instrument is available to counter disorderly market moves, and Lagarde said the bank has tools to respond. But she said heavily indebted governments must plan for higher borrowing costs. She also tied part of the global rise in long-term yields to debt issuance by some of the big technology companies known as hyperscalers. The ECB's statement said AI-related business investment was supporting euro zone manufacturing, digital services and exports.

In Asian trading on Friday, the euro bought about 176 yen, down about 1% over four weeks, and about 7.44 yuan, up 1.4% over the same period but 9.4% weaker than a year earlier, Trading Economics data showed. The yen firmed toward 157 per dollar after the Bank of Japan held its policy rate at 1.25% in an 8-1 vote. The Fed kept its target range at 3.75% to 4% on Wednesday in a 10-2 vote, with both dissenters preferring a quarter-point increase, according to its statement.

Lagarde's last scheduled press conference as president falls on Feb. 4, three days before she leaves.