Unlock Editor’s Digest for free
Roula Khalaf, editor of the FT, picks her favorite stories in this weekly newsletter.
The European Central Bank will not start cutting interest rates at least “in the next few quarters,” said its President Christine Lagarde.
Lagarde told the Financial Times’ Global Boardroom conference on Friday that inflation in the euro zone would fall to its 2 percent target if interest rates were kept at their current levels “long enough.”
But she added: “It’s nothing [means] We will see a change in the next few quarters. “Long enough” must be long enough.”
Last month, the ECB left its key deposit rate unchanged, ending a series of 10 consecutive hikes that took it from a record low of minus 0.5 percent last year to an all-time high of 4 percent in a bid to curb inflation.
Markets are now pricing in a 75 percent chance of an ECB interest rate cut by April, up from a 30 percent chance at the start of October.
Lagarde said euro zone inflation could still recover from its recent two-year low, especially if there is another supply shock in the energy sector.
Inflation in the 20-nation single-currency bloc slowed to 2.9 percent in October, below its peak of 10.6 percent a year earlier. But core inflation, which excludes volatile energy and food prices, remained at 4.2 percent – more than double the ECB’s target.
“We should not assume that this respectable overall rate of 2.9 percent can be taken for granted,” Lagarde said. “Even if energy prices remained where they are, we are likely to see higher numbers again in the future, and that is what we should expect.”
Already halfway through her eight-year term after replacing Mario Draghi in 2019, Lagarde has had to deal with a series of shocks that have highlighted the fragility of the euro zone economy, including the coronavirus pandemic and Russia’s full-scale invasion of Ukraine.
Lagarde was criticized for being too slow to deal with the biggest rise in inflation in a generation and oversaw the most aggressive rise in interest rates in the ECB’s history.
Now it is trying to manage a delicate balancing act: keeping borrowing costs elevated long enough to ensure price pressures are curbed without triggering a destabilizing recession or another debt crisis in the region.
The Eurozone economy came to a standstill this year. Gross domestic product shrank 0.1 percent in the three months to September, after growing just 0.2 percent in the previous three quarters. Some economists think it could contract again in the fourth quarter.
Lagarde said: “We are in this fascinating race against time in which the calibration of our monetary policy must be simultaneously sustained and subtle.”
Asked about the financial sustainability of some highly indebted members of the euro zone, such as Italy, where debt has risen to over 140 percent of GDP, she said: “Many countries have taken advantage of very low interest rates to extend the life of their debt. “ ” Lagarde pointed out that the average debt servicing cost of euro zone countries was only 1.7 percent.
“But it is a fact that with the redemptions there will be refinancings and the financing costs will increase,” she added.
Lagarde said she was “a little reassured” by early signs that finance ministers of Germany and France had moved closer this week to an agreement on new budget rules for EU countries, which she said was “crucially important.”
The EU’s Stability and Growth Pact, which regulates government spending and borrowing and is widely seen as unworkable, has been suspended since the pandemic broke out in 2020 but is due to come back into force next year unless a reform is agreed beforehand.
Originally posted 2023-11-10 15:22:34.