ECB Insight: Lagarde More Confident About Disinflation, but Less Willing Than Ever to Steer Policy Expectations

17 October 2024

By David Barwick – FRANKFURT (Econostream) – The data at the disposal of the European Central Bank’s Governing Council during today’s monetary policy meeting must have been quite unambiguous indeed.

Not only did they lead to an interest rate cut – no surprise there – but they also, according to ECB President Christine Lagarde – convinced every last member of the Council of the need for such a move, easily the more unexpected aspect of the decision.

Of course, much of that data was publicly available, but for those elements not yet widely known, in particular relating to surveys that she cited at the press conference following the meeting, it was ‘the same story’, she said.

‘[W]e believe that the disinflationary process is well on track, and all the information that we received in the last five weeks … were headed in the same direction: lower’, she explained.

Still, that some Council members needed convincing was apparent from her reference to ‘the debate and the legitimate discussions’. It would not be the first time that members who would have preferred another outcome ultimately put aside those preferences to get behind the choice clearly set to prevail.

Lagarde herself seemed taken aback, suggesting in reference to the venue of Ljubljana for this remote Council meeting that it ‘may have been the Slovenian great atmosphere that precipitated this, more than consensus, there was a unanimous decision’.

As weak as inflation and growth may have appeared, policymakers ‘certainly do not see a recession’, she reported. ‘We are still looking at that soft landing’.

The stage is in any event set for another cut in December, but Lagarde was even more aware of the value of leaving things completely open, obviously mindful of how inconceivable any move today seemed five short weeks ago.

She thus roundly rejected an attempt to interpret her as having encouraged expectations of a December cut, insisting that she ‘did not open the door to anything’, but rather that the ECB would look at all available data at each meeting.

‘This is what we will do in December, and I would not … give any other commitment nor make any other statement in that respect’, she added. ‘[W]e are not precommitting.’

We assume that such absolute reticence on her part about the policy outlook was partly a concession to the hawks, but in any case, she declined even just to make explicit the logical conclusion to be drawn when all data are pointing ‘downward’, namely that the ECB could now expect to be at its target sooner than previously anticipated.

The ECB had not yet ensured a sustainable and timely return to its medium-term inflation target, she said. ‘So even if it could well be, as markets anticipate – but they are not always right – that the time at which we reach that 2% sustainably has advanced a bit, but it is not yet now, and we will have to wait further in order to make sure that we are at that 2% sustainable medium-term target’, she said.

Other attempts to elicit this concession from her yielded similarly little, with Lagarde simultaneously reiterating high confidence in continued disinflation but insisting that a new baseline could only come in a ‘strict, rigorous, published way when we have our December projection exercise’.

Even the possibility of undershooting she declined to entertain. ‘Risk of undershooting, risk of overshooting, we can debate ad nauseum on this particular matter, and you will find views on both sides of the equation’, she said ‘[W]hat is clear to all is that we still have risks on both sides of our forecast, upside and downside … probably more downside risks than upside risks.’

The ECB was not ready to declare victory over inflation, the neck of which it was still in the process of breaking, she said. Rates would hence be kept restrictive as long as necessary, she reiterated both in the monetary policy statement and during subsequent questioning.

We note that Lagarde was unusually unwilling to give what she called a ‘steer’, albeit the smallest of them, as to prospects for the next move – in September, she had not been able to resist offering a slight hint.

But then, in September she had also showed no reluctance about confirming that with respect to interest rates, ‘the direction is pretty obviously a declining path’.

That such things were absent reflects, we suspect, both a more spirited discussion than Lagarde let on, and the realisation by the ECB, brought home vividly today, that steering in the dark can easily result in a crash.