By Yoruk Bahceli and Harry Robertson
LONDON, Feb 18 (Reuters) – Traders on Wednesday were trying to work out what European Central Bank President Christine Lagarde’s potential early exit from her position might mean for monetary policy ahead.
For now, they stuck to their bets that the world’s second-largest central bank would keep policy on hold this year.
Germany’s two-year bond yield, which is sensitive to interest rate expectations, was up one basis point at 2.06%, while the 10-year yield was unchanged at 2.74%.
The euro was down just 0.3% at $1.1821.
The Financial Times reported that Lagarde plans to leave her job before her eight-year term ends in October 2027. She has not decided on timings but was keen that incumbent French President Emmanuel Macron and German Chancellor Friedrich Merz should be the key deciders on who succeeds her.
An ECB spokesperson said Lagarde was focused on her job and had not taken any decision regarding the end of her term.
The story adds impetus to the race to succeed Lagarde and brings potential uncertainty to the ECB, which markets expect to hold interest rates at 2% for an extended period.
But analysts and investors said an early Lagarde exit would have little impact on financial markets in the immediate future, with inflation under control and the most likely replacements to follow a similar policymaking line.
“I don’t think Lagarde’s possible departure significantly raises market uncertainty … This is not like the (Mario) Draghi-era where creative and unconventional policy was a constant feature,” said Ross Hutchison, head of euro zone market strategy at Zurich Insurance Group.
“The ECB is in a good place … This reduces the immediate risks of a change of leadership.”
Traders’ interest rate expectations barely budged on Wednesday, with markets still broadly expecting the ECB to hold rates rather than cut them by year-end.
MARKETS RELAXED ABOUT ECB CHANGE
Lagarde took a more moderating role among her peers compared to her predecessor Draghi, so investors are assessing whether that would continue under a successor.
They were scrutinising the historic views of potential successors, with Spain’s former central bank chief Pablo Hernandez de Cos and Klaas Knot, the previous head of the Dutch central bank, in focus as the main candidates.
Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, said Knot was seen as a “pragmatic hawk” and De Cos as more dovish, but that both showed balanced profiles, which would ensure policy continuity.
Andrzej Szczepaniak, senior European economist at Nomura, stressed that the ECB takes policy decisions by building consensus:
“Whoever replaces Lagarde is unlikely to radically shift or change the way the ECB works.”
Some analysts said the ECB’s reputation could suffer if it was seen to deny new governments a say in the choice of a powerful economic official.
Macron cannot run for a third term and the French presidential election in spring 2027 could bring the far-right Rassemblement National to power.
The report on Lagarde comes after French central bank governor Francois Villeroy de Galhau decided earlier in February to stand down early to allow Macron to name his replacement.
Lagarde “may have honourable intentions – protecting the ECB from populist political pressure – but this decision would be difficult to justify”, said Pictet Wealth Management’s Ducrozet.
“I’m not sure this is a risk worth taking.”
(Reporting by Harry Robertson and Yoruk Bahceli. Editing by Kevin Liffey, Chizu Nomiyama and Mark Potter)
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