ECB Insight: Lagarde, With a Little Help, Takes Another Misstep

17 January 2024

By David Barwick – FRANKFURT (Econostream) – It may well be that the European Central Bank will cut rates by the summer. We see this as being only just shy of a given, and that depends very little on the wiggle room in the words ‘by the summer’.

What it doesn’t depend on is what ECB President Christine Lagarde said earlier today, comments to which we consider interested parties to have wilfully applied the less appropriate of two potential interpretations.

To review, Lagarde was left to react in an interview with Bloomberg TV to the assertion that ‘the timing is quite fluid, but there seems to be a majority on the Governing Council that expect it [an initial rate cut] probably by the summer if not in the summer.’

Lagarde responded by first acknowledging the diversity of Council members’ backgrounds in terms of respective domestic macroeconomic data.

‘But it’s, and it’s their job to say, “Well, it’s likely that”’, she continued. ‘I would say “it’s likely”, too, 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.’

Purely grammatically, one could understand her to be saying that she, too, would agree that the start of monetary policy easing was likely ‘by the summer if not in the summer.’

We don’t think this is what she meant, though. In particular, we think that when Lagarde said that ‘it’s their job to say, “Well, it’s likely that”’, the word ‘that’ did not refer to the timing of a first interest rate cut as postulated by her interlocutor.

Rather, we think she had in mind an unspoken ‘whatever’ after the word ‘that’, meaning that she was simply saying that she sees it as the job of national central bank governors to tell their respective population what(ever) they think is likely.

From there it follows that when Lagarde stated that she ‘would say “it’s likely”, too’, she was merely saying that she would also say this, that or the other thing was likely, and not endorsing her questioner’s premise.

We think the rest of Lagarde’s response bears our understanding out. To repeat her words: ‘I would say “it’s likely”, too, 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.’

It would obviously make little sense for her to say, in effect, ‘I agree, but I can’t say I agree’, which is what that comment would amount to if she had really been confirming the date of the first interest rate reduction.

Moreover, she not only said that she could not provide a timeline for future monetary policy moves, but actually explained why by invoking the ECB’s data-dependence and referencing still-open questions.

Indeed, she went on at some length in this regard, adding: ‘Don’t forget that services, for instance, is still cruising at 4% inflation, services is the most sort of labour intensive sector of the economy and it's one that that we have to bring down towards 2%.’

As if all that were not enough, we note that the ECB has been very consistent about not offering precise forward guidance in this respect. The idea that its president would suddenly and spontaneously decide to so gratuitously let drop a crystal-clear hint as to timing and then immediately elaborate on why no date can be specified beggars imagination.

In the end, it is not for nothing that Lagarde has acknowledged her own fondness for reading rather than speaking extemporaneously. Add to that a lingering uneasiness on her part with the English language and a healthy motivation on someone else’s part for finding more news in Lagarde’s words than intended by Lagarde, and one has all the makings of such a misstep.

None of this, we note again, calls into question the likelihood of a first rate cut by summer. Only today, Governing Council member Gediminas Šimkus in comments to Econostream spoke of a ‘high probability’ of just such an outcome. We don’t see Lagarde being so explicit quite yet, and certainly not today.