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European Central Financial institution president Christine Lagarde has come nearer than ever to claiming victory within the combat in opposition to inflation, saying “the darkest days of winter look to be behind us” and that additional rate of interest cuts have been possible.
“The direction of travel is clear and we expect to lower interest rates further,” 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 collection of back-to-back strikes within the benchmark deposit fee over the primary half of 2025 on indicators of weak development and diminishing value pressures.
The ECB final week lowered borrowing prices for the fourth time this 12 months by a quarter-point to three per cent and watered down its hawkish language.
Lagarde on Monday mentioned the long-standing danger that top underlying inflation may derail the return to cost stability had “recently” subsided.
The ECB started elevating rates of interest in 2022 after a spike in costs following a post-pandemic surge in demand, international provide chain bottlenecks and rising power prices after Russia’s invasion of Ukraine.
Inflation hit a document excessive of 10.6 per cent in late 2022, greater than 5 occasions the ECB’s 2 per cent purpose.
Annual inflation has fallen quickly over this 12 months, coming right down to 2.3 per cent in November. It’s anticipated to hit 2.1 per cent subsequent 12 months and 1.9 per cent in 2026, in keeping with the ECB’s newest projections, printed final week.
“There is now greater alignment between our forecasts and underlying inflation,” Lagarde mentioned on Monday, including that the ECB was now “close to achieving our [2 per cent] target”.
Excessive wage development, the ECB’s most important remaining concern, would subside from 4.8 per cent this 12 months to three per cent in 2025, she mentioned: “The level we generally consider to be consistent with our target.”
Lagarde singled out the Eurozone’s weaker than anticipated financial restoration as a “downside risk” to inflation, declaring that “small sequential downward revisions to the growth outlook” since 2023 “amounted to a quite significant 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 forecast development of 0.7 per cent for this 12 months.
The contraction in Eurozone enterprise exercise eased on the finish of the 12 months, in keeping with a survey that confirmed a return to development in providers was offset by a continued discount in manufacturing output. The flash composite buying managers’ index, which is compiled by S&P International and Hamburg Industrial Financial institution, rose to 49.5 in December from 48.3 a month earlier.
The determine was above the 48.2 forecast from economists polled by Reuters, however nonetheless beneath the 50-point mark that separates development from contraction.
“The PMI is still lower than it was in October, and on past form remains consistent with the economy contracting,” mentioned Jack Allen-Reynolds, economist at Capital Economics. “The data will strengthen ECB policymakers’ view that further rate cuts are needed.”
Lagarde mentioned geopolitical uncertainties may alter “the risk appetite of investors, borrowers and financial intermediaries”. The ECB’s most important concern is {that a} dramatic and uncontrolled widening of bond spreads between Eurozone member states may make financial coverage much less efficient.
“Assessing monetary transmission will continue to be important,” Lagarde mentioned.
“If we face large geopolitical shocks that significantly increase uncertainty about the inflation projections, we will need to draw on other sources of data to make the risk assessment surrounding our baseline outlook more robust.”
Further reporting by Valentina Romei
