ECB Insight: Lagarde Notes Progress Towards Target While Remaining, as Expected, on Guard
14 December 2023
By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde performed much as expected on Thursday at the press conference following the Governing Council’s monetary policy meeting, acknowledging progress and not slamming any doors shut as she tempered her previous almost indignant rejection of early rate cuts and focused instead on the need to collect more data.
Lagarde suggested that her institution was in no hurry to follow the example of the U.S. Federal Reserve by speculating about its own vision of rate cuts next year, or to endorse market expectations of ECB policy easing as soon as March.
The ECB was ‘data-dependent’, she reminded. ‘We are not time-dependent.’
Still, her pushback against market pricing the ECB objects to was framed less as a vigorous rejection of a fantasy unworthy of serious consideration, and more as a sober reflection of lingering uncertainty about the sustainability of the improvement to date.
The inflation path to price stability ‘is flatter than it was before’, reducing concerns about the potential for expectations to disanchor, she said. Meanwhile, ‘a lot of indicators are showing that underlying inflation comes below expectation, with a decline across all components’, she said, and ‘we are clearly seeing a strong transmission’.
Nevertheless, when the Council asked itself whether it could lower its guard, its answer was ‘absolutely not’, she reported. One reason was the reliance of ECB forecasts on market rate expectations as of the 23 November cutoff date, she said, a point she made again towards the end..
Lagarde might have made somewhat more explicit the implicit warning that overly dovish financial markets could force the ECB to be less dovish than otherwise. She did not do so either time, turning instead to the other reason why the ECB had to remain on guard, namely that the wage-driven domestic component of underlying inflation was ‘hardly budging’.
Getting to the bottom of this required wage data ‘measured in multiple ways’ as well as more information on corporate profit margins, she said.
‘We don’t have that yet’, she said. ‘We will have a lot more data in the course of ’24. It will be particularly rich in the first half, but we will need that in order to determine whether it [disinflation] is actually sustainable or not.’
No surprise, therefore, that the Governing Council did not discuss rate cuts today, according to Lagarde. The entire Council understands that ‘between hike and cut there’s a whole plateau … of hold’, she said. There was ‘still work to be done, and that can very much take the form of holding’, she said.
Invited to stand by her categorical statement of 10 November ruling out policy easing ‘in the next couple of quarters’, Lagarde took the easy – and arguably only sensible - way out.
‘I think going forward we are going to be data-dependent’, she said, an approach never in doubt. However, she reiterated, the ECB had to be ‘very attentive’ to wage and profit data.
The fact that PEPP reinvestments would be halved from mid-2024, at which point much currently lacking inflation-relevant data would be available, should not be overinterpreted with respect to possible interest rate decisions, she indicated. “We will remain attentive to a whole host of data that will come in in the course of ‘24’, she said.
Overall, we and probably most observers got what we were looking for, namely a Lagarde performance ‘not exceeding an incremental change in the rhetoric – more drift than shift, more progression than inflection point’, as we wrote on Tuesday.
We expect, and see the stage set for, another incremental shift at the next such occasion on 25 January.