ECB Insight: A Perfectly Prepared Lagarde Stays Squarely on Message in Leaving Rate Path Open

13 September 2024

By David Barwick – FRANKFURT (Econostream) – ECB press conferences don’t get much more flawless than the one following Thursday’s meeting of the Governing Council, with President Christine Lagarde giving nothing less than a masterclass in how to beat back attempts to thwart the ECB’s patient approach to monetary policy.

It would have made little sense to us – as made clear previously - for the ECB to deviate wilfully at this stage from its attitude of meeting-by-meeting data-dependence, but accidents happen, and there was no shortage of observers keen to stage one. A perfectly prepared Lagarde diligently avoided every pitfall, offering only one slight hint that markets shouldn’t get their hopes up for another cut in October.

‘Qué será, será’, she countered the first journalist to inquire about subsequent rate moves following the 25bp cut just decided. ‘Because we have consistently said, and we repeat again, that we shall remain data-dependent, and that is particularly justified in view of the uncertainty that abounds.’

Although the direction of interest rates was ‘pretty obvious, a declining path’, she said, the path was nevertheless ‘not predetermined, neither in terms of sequence nor in terms of volume.’

The most interesting moment came with Lagarde’s renewed assurance that the ECB was data-driven, but not fixated on single data points. This pointed reminder, she made implicitly clear, was warranted by the probability of deceptively encouraging inflation numbers at the time of the next Governing Council meeting.

‘And I’m saying that in particular because September will certainly deliver a low reading of inflation. Very likely’, she explained. ‘We expect, because of the base effect, particularly on energy, our inflation numbers to be up in the fourth quarter, so the last three months of 2024. But September is going to deliver a low reading.’

We see only one obvious interpretation, namely that the ECB will resist being unduly influenced five weeks hence by the latest, predictably positive inflation developments. In other words, while Lagarde excluded nothing, she played down, in appropriately understated fashion, the likelihood of another cut in October.

Invited by a subsequent questioner to reinforce that message by repeating what she’d said in March about the ECB expecting more data in April, but a lot more in June – effectively signalling the likelier date of the first rate cut – Lagarde agreed that the mere 35 days separating the this month’s meeting from October’s was ‘a relatively short period of time compared with other intervals that we’ve had in the past.’

That, however, was just an incontrovertible fact of the calendar, she indicated, refusing to go any farther than reiterating that the ECB was data-dependent and would decide meeting by meeting.

‘I’m not giving you any commitment of any kind as far as that particular date is concerned’, she insisted. ‘And our path is not predetermined at all.’

Similarly, Lagarde avoided encouraging thoughts of a 50bp cut anytime soon, a possibility the first question of the press conference sought to explore. Her response instead cemented the idea that smaller steps better corresponded to the slow retreat of euro area inflation under high uncertainty.

‘[W]e thought that given the gradual disinflationary process, it was perfectly appropriate to moderate the degree of monetary policy restriction by cutting our deposit facility rate’, she said. Later she referred to the move as ‘perfectly legitimate’, leaving us wondering just a bit whether this was a case of defensiveness.

Still, the 25bp cut was unanimous, as she was pleased to report, meaning that the resilience of the existing inflation outlook - with price stability still seen restored at the end of next year - had led hawkish Council member Robert Holzmann, the entire opposition in June, to join the crowd this time, just as we expected.

All in all, we think Lagarde will have been very satisfied with the outcome of the September Governing Council meeting and, more generally, with how the easing process has been going. The June start appears well justified, the gradual approach both suitable for circumstances and still enjoying wide support, communication to be effective and consistent.

We continue to think that, barring a significant change in the environment that might be hard to capture in numbers by the time of the October meeting, given the relatively short time until then, the next move is likely to be another 25bp cut in December.