Christine Lagarde, president of the ECB, tries to curb the doves’ hopes, but in doing so it also gives an indication of when the Eurotower might start cutting interest rates.
“It will take more than two quarters before the ECB starts cutting rates,” Lagarde said today, also indicating what could be the optimal level of rates to ensure that inflation growth returns to the levels desired by Frankfurt.
The level would be 4% deposit rates (they were negative at -0.50% before the ECB began to raise rates in July 2022, declaring war on inflation, which broke out after the start of the war in Ukraine on 24 February last year.
ECB, Lagarde slows down the doves. But in doing so she indicates when she might cut rates
Christine Lagarde, number one of the ECB, spoke on the occasion of an event organized by the Financial Times, addressing (finally, according to many) the possibility that the European central bank will begin to cut rates, after having stand up continuously 10 times in a row starting from July 2022, before announcing the much-needed break (by the markets and by various euro area governments, the Meloni government first and foremost), at the last meeting on 26 October.
Lagarde effectively said that, although inflation could rear its head again, the current level of rates should be restrictive enough to be able to stem the threat of out-of-control inflationary pressures and, above all, to bring back price growth to the ECB’s target of 2%.
Lagarde’s statements also lead to the identification of the month in which the European Central Bank could start cutting rates: April 2024, as notes a Reuters article.
In the last meeting of the Governing Council at the end of October, the ECB, as expected, left the rates on main refinancing operations, marginal refinancing operations and deposits at the central bank respectively al 4.50%, al 4.75% and al 4.00%.
The decision was motivated by the weakening of inflation.
In fact, Lagarde specifically referred to the to the trend of the Eurozone consumer price index, one of the most important parameters for monitoring the trend of inflationary pressures which, in the month of September, slowed down, rising by 4.3% on an annual basis, at the lowest growth rate since October 2021, a sharp retreat from August’s 5.2%.
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Also on that occasion, Lagarde remained firm in reiterating that it was too early to start thinking about the possibility of cutting rates, due to estimated inflation “too high for too long a period of time”.
With a statement that agreed with the hawks, the ECB’s number one had actually underlined that “the fact that we are leaving rates unchanged It doesn’t mean we won’t raise them again.”
ECB reassured by inflation data, but will not lower its guard
Today, however, the Dovish imprint is clear given that, in seeking not to give false hopes to the markets and to those who have long been asking for a change in monetary policy in the euro area, Lagarde finally spoke about the possibility that rates could be cut, also giving indications as to when.
“The level we are at at the moment, if we can maintain it for a long enough period of time, and we can argue about that, will make a significant contribution to bringing inflation back to our 2% target.”
Lagarde attempted to curb enthusiasm, underlining that “there will be no rate cuts in the next two quarters.”
The clarification, obviously, was not missing:
“In the case of should major shocks arise, we would review our position, depending on the nature of the shocks.”
Therefore, Christine Lagarde’s determination to carefully monitor the price dynamics in the Eurozone remains. Having said that, the level to which the deposit rate was brought with the repeated monetary tightening of the last year seems to reassure Frankfurt.
Then there is that new data on headline inflation in the euro area, which indicated growth of just 2.9% in October. More than enough reason to start looking beyond a policy focused on monetary tightening.
Of course, said Lagarde; “We really need to monitor energy prices going forward and we must not assume that this respectable inflation number of 2.9% is something we can take for granted, and for a long time.”
As a result, the European Central Bank will remain vigilant, ready to retrace its steps should the need arise.
Lagarde’s speech follows that offormer President of the ECB and former Prime Minister Mario Draghi who, speaking at the same event organized by the Financial Times, said the day before last night that he believes that the risk of a recession in the Eurozone is present, specifying however that, if it materialised, the recession would be neither destabilizing nor deep.
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