ECB Insight: Lagarde’s Meal Begins, With Crow on the Menu

11 June 2024

By David Barwick – FRANKFURT (Econostream) – More than anything else, Tuesday’s interview of European Central Bank President Christine Lagarde with various European newspapers was an answer to the question, ‘How do you say Holzmann was right without saying Holzmann was right?’

Holzmann of course being Austrian National Bank Governor Robert Holzmann, the lone member of the ECB’s Governing Council to spoil Lagarde’s treasured unanimity by opposing last week’s 25bp interest rate cut.

It’s not just that Lagarde had to resort to undisguised evasiveness when asked by Expansión, Handelsblatt, Il Sole 24 Ore and Les Echos whether a pause after one rate cut would entail a credibility cost for the ECB.

‘First of all’, she started (there was however no ‘second’), ‘we haven’t finished the restrictive monetary policy cycle yet.’

That doesn’t shed light on anything, it not being a point of contention that a deposit facility rate of 3.75% remains about as restrictive as the 4% level prevailing up to Thursday’s cut.

Mercifully for her, her interlocutors let her off the hook with the rest of that non-answer – at least according to the transcript approved by the ECB for publication.

From there Lagarde sought to put last Thursday’s decision into perspective. Policymakers ‘looked at all sorts of data, including some recent numbers which could have been better, and also our revised staff projections’, she said.

In other words, the deterioration of the outlook on the eve of the cut did not dissuade the Council (as a whole) from going through with what they had already clearly signalled would be the outcome.

Neither this contradiction, nor what paved the way to it – an ECB that essentially pre-committed out of one side of its mouth whilst swearing by data-dependence out of the other - ever made it into the published interview, unfortunately.

Admittedly, it may be early for such public introspection. At this point, it is what it is and markets need to adjust to the implication of the ECB having cut before it would have, had it left itself more of a choice in the matter.

That implication promptly came up in the interview. Interest rates were not necessarily ‘on a linear declining path’, she said. ‘There might be periods where we hold rates again.’

These periods might be longer than one Governing Council meeting, she confirmed, meaning that an entire quarter could pass without the ECB continuing to ease monetary policy.

Such profound uncertainty, one would think, would lead a central bank to approach the start of easing with greater caution than the ECB showed last week. Cutting rates when you then have to leave completely up in the air the question of when (and implicitly whether) you will do so again makes limited sense.

In the end, it was only Holzmann, correctly proclaiming, ‘Data-based decisions should be data-based decisions’, who declined to support the charade.

It must be a bitter pill for Lagarde, who had tried so hard to get right the timing of the shift to another phase of the monetary policy cycle, to have mismanaged the process at the last moment.

That said, the decision to cut rates last week was something of a train wreck in slow motion, given how stubbornly the ECB insisted on painting itself into a corner, all while vaunting its supposedly data-driven, meeting-by-meeting approach.

Unfortunately for her, this is no one-off visible only in the rearview mirror starting the very next day. Rather, this will be an ongoing topic for, potentially, months.

All is not lost yet, however. If developments in the coming weeks turn out to be such that the ECB can cut again in September, as we assume she is praying for, then Lagarde will have avoided the worst – though not all - by the skin of her teeth.

The danger of course is that the data available in September will again fail to speak a clear language, but that the desire to prevent the June cut from appearing definitively premature will act as a finger on the scale – even if the ECB now adheres more strictly to data-dependence.