Lagarde: We are not pre-committing to a particular rate path
Over at the Bank of Slovenia, in Ljubljana, the European Central Bank is holding a press conference to explain why it has lowered eurozone interest rates today.
ECB president Christine Lagarde begins by running through the statement issued half an hour ago (it’s online here).
She’s explaining that the ECB’s governing council decided to lower the three key ECB interest rates by 25 basis points, because data shows that the disinflationary process is well on track.
As flagged earlier, Lagarde says that inflation is expected to rise in the coming months, before declining to target in the course of next year.
And she insists that the Governing Council is “determined” to ensure that inflation returns to its 2% medium-term target in a timely manner.
She says:
It will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim. The Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction.
In particular, its interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission.
The Governing Council is not pre-committing to a particular rate path.
[They’re in Slovenia as part of the ECB’s policy of occasionally holding meetings away from Frankfurt]
Key events
Lagarde: We are breaking the neck of inflation
Under questioning by journalists in Solvenia, ECB president Christine Lagarde says the central bank is in the process of ‘breaking the neck’ of inflation.
In a surprise turn of phrase, she declares:
“Have we broken the neck of inflation. Not yet.
Are we in the process of breaking that neck? Yes.”
Lagarde reveals that she popped to the market in Ljubljana (where the governing council held this month’s meeting) earlier this week, to check prices.
She points out that food, alcohol & tobacco prices across the eurozone rose 2.4% over the last year – that’s too high for the ECB’s comfort.
She adds:
Are we breaking the neck of it? Yes, I think so.
It’s not broken completely yet, but we’re getting there.
The ECB chief also admits that inflation is not yet sustainably at its 2% target, even though it fell below the target to just 1.7% last month.
The time at which we reach that 2% sustainably has advanced a bit, it is not yet now. We will have to wait further.”
Christine Lagarde says the European Central Bank is looking at the economic risks posed by the conflict in the Middle East.
She tells reporters that the ECB is concerned about the “major” and “horrifying” conflict, beyond the humanitarian implications, saying:
We are looking at the economic consequences. And we are looking in particular at the impact that this conflict could have on trade, because that part of the world is very much open to trade and the passage of ships…
We are also very attentive to the price of oil – that can be impacted.
The European Central Bank remains hopeful that it can pull off a ‘soft landing’ – cooling inflation without triggering a recession.
Christine Lagarde insists today that “the disinflationary process is well on track”, which allowed the central bank to cut rates today.
She told reporters:
“Are we still on a soft landing expectations? The answer is, on the basis of the information that we have, we certainly do not see a recession. So the euro area, on the basis of what we have, is not heading for recession.
And we are still looking at that soft landing.”
Christine Lagarde points out that eurozone inflation fell in September to 1.7%, the lowest since April 2021, thanks to a 6.1% drop in energy inflation.
Eurozone government should design their fiscal and structural policies to make their economies more productive, competitive and resilient, Christine Lagarde says.
It is ‘crucial’ to follow up on the proposals made this year by Mario Draghi (on competition) and Enrico Letta (on reforming the single market), she adds.
The ECB expect the eurozone economy to strengthen over time, as rising real incomes lift household consumption, Lagarde says.
Lagarde says that the eurozone labour market remains resilient, with unemployment still low.
But employment growth is slowing, surveys suggest.
Lagarde: Economic activity has been somewhat weaker than expected
Turning to the economic picture, Lagarde says the incoming information suggests that economic activity has been “somewhat weaker than expected”.
Manufacturing has continued to contract, she warns, while the services sector ticked up in August, but has been more sluggish since.
Business are only expanding their investment slowly, while housing investment continued to fall.
Exports have weakened, especially for goods, she adds.
Lagarde: We are not pre-committing to a particular rate path
Over at the Bank of Slovenia, in Ljubljana, the European Central Bank is holding a press conference to explain why it has lowered eurozone interest rates today.
ECB president Christine Lagarde begins by running through the statement issued half an hour ago (it’s online here).
She’s explaining that the ECB’s governing council decided to lower the three key ECB interest rates by 25 basis points, because data shows that the disinflationary process is well on track.
As flagged earlier, Lagarde says that inflation is expected to rise in the coming months, before declining to target in the course of next year.
And she insists that the Governing Council is “determined” to ensure that inflation returns to its 2% medium-term target in a timely manner.
She says:
It will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim. The Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction.
In particular, its interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission.
The Governing Council is not pre-committing to a particular rate path.
[They’re in Slovenia as part of the ECB’s policy of occasionally holding meetings away from Frankfurt]
German Conservative MEP Markus Ferber, who is the EPP Coordinator in the European Parliament’s Economic and Monetary Affairs Committee (ECON), has welcomed today’s rate cut.
Ferber says:
“The decision to lower interest rates is the right decision at the right time. Inflation data has come in good, growth is sluggish and other central banks have also started to lower rates. In light of recent developments, another rate cut was the only sensible choice. The ECB would be well advised to stay the course.
The key challenge in monetary policy is getting the timing right as monetary policy only works with a considerable time-lag. The ECB cannot only respond to data, it also has to anticipate developments. If you only ‘drive by sight’ you might miss the right moment to correct course. The ECB has been overly cautious in the past and it is good news that Lagarde does not make the same mistake twice.
The sluggish European economy needs a liquidity boost, but monetary policy is not the silver bullet. We will only get back on a path of growth, if EU governments do something about productivity growth and reforms.”
The euro slipped to a new 10-week low after the ECB announced it had cut interest rates again.
The single currency dropped to $1.0832, the lowest since 2nd August, before recovering slightly to $1.0842.
Dean Turner, chief eurozone economist at UBS Global Wealth Management, predicts the ECB will squeeze in another rate cut before the end of this year, saying:
“The ECB cut rates for the third time in this cycle today, in a move that was widely expected following a string of softer economic data.
In our view, this is unlikely to be the last cut from the ECB this year. Another cut is likely in December, and we expect this will be followed by a series of cuts at every meeting through to June next year, with the deposit rate hitting 2% before the ECB reaches for the pause button.
ECB rate cut: what the experts say
Financial experts had generally expected the European Central Bank to cut interest rates today, so there’s no shock at the decision.
Yael Selfin, chief economist at KPMG, says the ECB was “compelled into action today” as the economic outlook “turns for the worse”.
Selfin explains:
The limited data flow ahead of the decision meant the ECB placed more weight on a raft of survey evidence which signalled a deteriorating economic backdrop. Domestic activity shows no sign of improvement as households remain cautious despite robust growth in household incomes. Meanwhile geopolitical tensions are clouding the outlook for Eurozone exports.
“Today’s decision reflects a growing number of Governing Council members feeling more confident about inflation returning sustainably to target in the medium term. Moreover, the ECB will likely have been attentive to the fact that the weakening growth outlook could be a contributing factor to inflation undershooting in the medium term, and will likely want to avoid a repeat of the pre-pandemic era.
Lindsay James, investment strategist at Quilter Investors, points out that this the first time in 13 years that the ECB has announced a back-to-back interest rate cut (it also lowered rates in September).
James adds:
With inflation now sitting well below the ECB’s target and economic growth still sluggish, markets had been expecting the Bank would continue on its path of rate cuts….
“Looking ahead, the ECB will be keeping an extremely close eye on the data that comes out before its December meeting. It will be pleased that inflation has finally come in lower than target, but keeping the economy afloat will be its next challenge.”
Jim Gott, head of asset surveillance at Mount Street, agrees that today’s decision was expected, given “the stagnating European economy and falling inflation”:
Germany, the continent’s economic powerhouse, is clearly struggling, while the likes of Spain and Italy have been more resilient. This shift is evident in the uptick in Commercial Real Estate deals in southern Europe, which is a complete reversal from 2012.
There remains a major economic imbalance in the Eurozone – German GDP growth is lagging behind other major European economies, whilst its debt balance is also lower – which continues to pose a challenge for the ECB. Whilst the whole Eurozone will benefit from today’s rate cut, the impact on the German economy is likely to be minimal.”
It’s notable that the ECB talks about “recent downside surprises in indicators of economic activity” (see earlier post).
That’s an acknowledgement that the economic outlook has deteriorated; Germany, Europe’s largest economy, appears to be falling into recession, while the eurozone only grew by 0.2% in the April-June quarter.
ECB: Inflation is expected to rise in the coming months
The European Central Bank also predicts that inflation will pick up in the coming months, before dropping back to its 2% target next year.
It says:
Inflation is expected to rise in the coming months, before declining to target in the course of next year. Domestic inflation remains high, as wages are still rising at an elevated pace.
At the same time, labour cost pressures are set to continue easing gradually, with profits partially buffering their impact on inflation.
