ECB Insight: Villeroy Punctures Lagarde’s Balloon of Strategic Ambiguity, Offers Clarity on October Cut

7 October 2024

By David Barwick – FRANKFURT (Econostream) – Hours after our prediction one week ago that the European Central Bank’s Governing Council would cut interest rates in October, ECB President Christine Lagarde dropped what we and others considered a corroboratory hint. For those not fond of her strategic ambiguity, Council member François Villeroy de Galhau has now provided greater clarity.

[T]he latest developments strengthen our confidence that inflation will return to target in a timely manner’, Lagarde told the Committee on Economic and Monetary Affairs of the European Parliament on 30 September. ‘We will take that into account in our next monetary policy meeting in October.’

That the Governing Council would take into account its confidence in the disinflation process one can take for granted. The point is that she would not have bothered to state the obvious without good reason, as the markets well understood.

Not every Governing Council member got it, with one telling Econostream that ‘for me it would mean nothing’ that Lagarde essentially said ‘exactly what data-dependence of course means’.

We agree that the beauty of the hint is that if the Governing Council were to do nothing in October, no one could reproach Lagarde based on her little comment in Brussels.

At least, that *was* the beauty of the hint. Asked in an interview published Monday by Italian daily la Repubblica whether a rate cut could be expected in October, her compatriot, Banque de France Governor Villeroy, replied, ‘Yes, quite probably, as President Lagarde hinted in the European Parliament last Monday.’

That is, he joined us and many others in predicting a rate cut on 17 October, and simultaneously confirmed that Lagarde’s comment was indeed to be understood as flagging precisely such an outcome, thus compromising the strategic ambiguity of her signal and making it more difficult, though not impossible, to back out of it.

Not that we think Lagarde will wish to back out of anything. Still, we could understand why someone might point at the significant upward revisions of the PMIs, the oil price surge of recent days, or even the latest non-farm payroll data in the US as reasons to tread carefully.

We don’t know whether Villeroy coordinated his words with Lagarde. As far as we know, he only sometimes shares with her in advance speech texts. His response to an interview question seems much less likely to have been previously agreed with her, though one might naturally suppose that he had knowledge of her thinking and that his response was informed by this knowledge.

At any rate, Villeroy of course also avoided making any pre-commitment, instead defending as usual optionality, pragmatism and a strictly meeting-by-meeting approach to setting monetary policy.

All the same, it is clear that his latest intervention did not make the October rate cut we were already expecting less likely.