Christine Lagarde says it is “premature” to talk about European Central Bank rate cuts because, as president, she is caught between two force fields. The euro area economy, close to recession, suggests a rapid cut. Yet many in the ECB are thinking about their own credibility: they do not want to act before they are certain that inflation does not risk rising again and forcing them to make new increases. In this they apply the same and opposite logic to that which pushed them to raise rates one last time last September: not out of necessity but out of “confidence”, in search of additional insurance of being able to bring inflation to 2% required by 2025. Today the ECB’s wait before cutting rates, probably not before June, can be explained by the same insurance logic: easy to criticize from the outside; but immediate to absorb when you have the office on the upper floors of the Frankfurt tower, with the related responsibilities. “We need to be further along in the disinflation process before we can have sufficient confidence that inflation will reach the target (of 2%, ed.) in time and in a sustainable way,” Lagarde said yesterday.
A reading of the painting different from that of Giancarlo Giorgetti
The president of the ECB, in her press conference after yesterday’s Governing Council, presented a reading of the picture that was deliberately different from that of Giancarlo Giorgetti. On Saturday in the Corriere, the Minister of Economy had explicitly criticized the ECB: «If you think of reaching 2% as soon as possible by raising rates – Giorgetti had said – then the objective is to do it through a recession. It’s happening. As long as it works, otherwise we will be in stagflation.” Lagarde gave a less gloomy reading: «The PMI data (managers’ confidence, ed.) are stabilizing – she said – and everything is in order to see a recovery» in 2024. Lagarde quoted the US Treasury secretary Janet Yellen, at a time when the American economy had suffered two quarters of decline in gross product: “It’s not a recession,” Yellen said, “not with these high levels of employment.”
The relationship with the labor market
For the ECB, much now depends on the labor market. Unemployment at 6.4% in the euro zone and 7.5% in Italy in November is at its lowest level for over twelve years for the country and, for the area, since the single currency existed. In these data lies much of the ECB’s hope of avoiding a recession, despite Germany’s difficulties. However, these data also hide the greatest risks and difficulties for Lagarde. To curb market expectations, which saw a rate cut already in March, the ECB has been making it clear for months that it wants to see the new collective agreements for the next few months before cutting rates: in order to avoid spirals between wages and prices. Yesterday Lagarde confirmed that a complete picture from Eurostat will not be available before the end of April, so June becomes the first opportunity to start reducing the cost of money. But Lagarde also said that in the immediate future the price dynamics “will decline faster than expected” and the problems in the Red Sea should not create too many repercussions for now. Certainly the Ifo, the business confidence index in Germany, is continuing to fall more and more. Meanwhile, the American economy, also driven by public deficit spending, closed the fourth quarter of 2023 with growth of 3.3% (in annual projection).