eBusiness Weekly
Bloomberg
The European Central Bank is likely to cut interest rates in the summer, according to President Christine Lagarde.
Interviewed at Bloomberg House in Davos by Francine Lacqua, she was asked if there could be majority support for such a move, given that several policymakers have signalled that timing.
“I would say it’s likely too,” Lagarde said. “But I have to be reserved because we are also saying that we are data dependent and that there is still a level of uncertainty and some indicators that are not anchored at the level where we would like to see them.”
Just a day before the start of the so-called quiet period that precedes ECB monetary-policy meetings, the president is joining many of her colleagues in seeking to damp expectations of imminent loosening while acknowledging that officials are on a path to ultimately lower borrowing costs.
“You’ve talked to some of them, they have spoken recently, and each of them has their view, which I respect completely,” Lagarde said. “We generally coalesce towards the decisions that we make on the basis of data. Some of them have their local domestic data, they have their respective inflation rates, which are different from one country to the other.”
What Bloomberg Economics Says…
“The ECB is still concerned about upside risks to wages and Governing Council members, most notably Chief Economist Philip Lane, have signalled they should wait until they have the data for the first quarter of this year before starting to loosen policy.
This points to June as the most likely date for the first rate cut.” —Maeva Cousin, senior economist. For full note, click here
While the president recognized how consensus is forming, she also said that market bets on aggressive rate cuts are a distraction.
“It is not helping our fight against inflation if the anticipation is such that they are way too high compared with what’s likely to happen,” Lagarde said.
Money markets responded to her comments on Wednesday by paring the extent of cuts expected from the ECB this year. They now see about 140 basis points by year-end — equivalent to five quarter-point moves, with a 60 percent chance of a sixth.
Traders were fully pricing in six reductions at the end of last week. There’s also less conviction that the first move will come as soon as April, seen as a certainty until now.
Dutch central bank chief Klaas Knot, speaking concurrently on CNBC, chimed in with his view on investor bets.
“Markets are getting ahead of themselves, it’s pretty clear, and the problem for us is that in the end that might become self-defeating,” he said. “We are optimistic that we have a credible prospect of a return of inflation to 2 percent in 2025 but a lot still needs to go well for that to happen.”
Fellow Governing Council member Bostjan Vasle said Wednesday that “it’s absolutely premature to expect the first cuts at the beginning of the second quarter,” while his French counterpart — Francois Villeroy de Galhau — said it too early to say when in 2024 the ECB will start to cut rates as the decision will be guided by data.
Lagarde acknowledged too that officials need more evidence before they can be sure that consumer prices are under control.
“We are on the right path, we are directionally towards the 2 percent, but unless and until we are confident that it is sustainably at 2 percent — medium-term — and we have the data to support it, I’m not going to shout victory,” she said. “Not yet.”
