ECB’s Lagarde says summer rate cut ‘likely’
DAVOS: The European Central Bank could start cutting interest rates this summer, president Christine Lagarde said Wednesday, while stressing that any such move would depend on the latest economic data. The ECB began hiking borrowing costs at an historically fast pace in July 2022 to tame redhot inflation after Russia’s war in Ukraine sent energy costs soaring. Easing inflation and a darkening economic picture since then led the ECB to freeze borrowing costs at its last two meetings, prompting speculation about when the Frankfurt institute might start cutting rates. In an interview with Bloomberg television in Davos, Lagarde was asked to comment on hints by ECB governing council members that cuts could come in the summer. “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.” Markets have been pricing in rate cuts from as early as April, but ECB governors have been at pains to tamp down those expectations in recent weeks.
Eurozone inflation stood at 2.9 percent in December, down significantly from a double-digit peak in late 2022, but still above the ECB’s two-percent target. Lagarde said inflation was “on the right path” but it was too early to declare victory. She cited energy prices and possible supply chain disruptions as key risk factors. The ECB was also keeping a close eye on wage negotiations in the eurozone as well as companies’ profit margins for their potential “serious impact” on the bank’s battle against inflation, she added. “We will know a lot more, probably in April, May,” Lagarde said, once wage agreements have been concluded.
Lagarde had said on Thursday that interest rates in the eurozone had reached their peak after rising rapidly in response to high inflation last year. “I think that we are at the highest point and barring additional shocks... rates are very probably not going to continue to rise,” Lagarde said in an interview on French broadcaster France 2.
“I think they have reached their peak,” she said, but refused to be drawn on a possible cut to borrowing costs. “I cannot give you a date,” she told her interviewer. “If we win the battle against inflation, if we are sure inflation will be at two percent, then the rates will start to go down,” Lagarde said, referring to the ECB’s inflation target.
The ECB raised rates higher and faster than ever to tackle sky-high inflation, driven by soaring energy prices in the wake of the Russian invasion of Ukraine in 2022. The pace of consumer price rises has cooled significantly since inflation hit its double-digit peak at the end of 2022, but remains above the ECB’s target. Most recently, eurozone inflation rose slightly in December to 2.9 percent, an increase that was widely anticipated. At its last meeting at the end of last year, the ECB warned that the fight was not over but held borrowing costs steady for a second consecutive time. The pause left the benchmark deposit rate at a record high of four percent.