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European Central Financial institution president Christine Lagarde has come nearer than ever to claiming victory within the battle towards inflation, saying “the darkest days of winter look to be behind us” and that additional rate of interest cuts have been doubtless.
“The course of journey is obvious and we anticipate to decrease rates of interest additional,” Lagarde mentioned in Vilnius on Monday.
Lagarde’s remarks are prone to bolster monetary markets’ expectations of extra ECB cuts. Traders have already been pricing in a sequence of back-to-back strikes within the benchmark deposit fee over the primary half of 2025 on indicators of weak progress and diminishing worth pressures.
The ECB final week lowered borrowing prices for the fourth time this yr by a quarter-point to three per cent and watered down its hawkish language.
Lagarde on Monday mentioned the long-standing danger that prime underlying inflation may derail the return to cost stability had “just lately” subsided.
The ECB started elevating rates of interest in 2022 after a spike in costs following a post-pandemic surge in demand, world provide chain bottlenecks and rising power prices after Russia’s invasion of Ukraine.
Inflation hit a report excessive of 10.6 per cent in late 2022, greater than 5 occasions the ECB’s 2 per cent aim.
Annual inflation has fallen quickly over this yr, coming all the way down to 2.3 per cent in November. It’s anticipated to hit 2.1 per cent subsequent yr and 1.9 per cent in 2026, based on the ECB’s newest projections, revealed final week.
“There’s now higher alignment between our forecasts and underlying inflation,” Lagarde mentioned on Monday, including that the ECB was now “near attaining our [2 per cent] goal”.
Excessive wage progress, the ECB’s foremost remaining concern, would subside from 4.8 per cent this yr to three per cent in 2025, she mentioned: “The extent we typically take into account to be in keeping with our goal.”
Lagarde singled out the Eurozone’s weaker-than-expected financial restoration as a “draw back danger” to inflation, mentioning that “small sequential downward revisions to the expansion outlook” since 2023 “amounted to a fairly vital downgrade over time”.
Whereas the central financial institution final summer time predicted an annual 1.8 per cent improve in GDP for 2024, it now solely foresees progress of 0.7 per cent for this yr.
The ECB president mentioned geopolitical uncertainties may alter “the danger urge for food of buyers, debtors and monetary intermediaries”. The ECB’s foremost concern is {that a} dramatic and uncontrolled widening of bond spreads between Eurozone member states may make financial coverage much less efficient.
“Assessing financial transmission will proceed to be necessary,” Lagarde mentioned.
“If we face giant geopolitical shocks that considerably improve uncertainty in regards to the inflation projections, we might want to draw on different sources of knowledge to make the danger evaluation surrounding our baseline outlook extra strong.”