ECB Insight: Did Lagarde, in Highlighting Uncertainty, Hint That This Could Limit Rate Cuts’ Size?

12 December 2024

By David Barwick – FRANKFURT (Econostream) – As in October, European Central Bank President Christine Lagarde adhered again on Thursday to the ECB’s data-driven, meeting-by-meeting approach to setting monetary policy. Still, the scepticism with which she responded at the press conference to a question about a potential 50bp cut next month was hard to overlook.

Confronted with newly risen market expectations of a large rate cut in January and asked whether she had ‘any thoughts on that’, Lagarde responded somewhat dismissively. ‘No, I don’t really think about that’, she said. ‘But I would simply observe that that was the case also a few weeks ago, and things changed over the course of time, depending on data’.

Lagarde was of course referring to inflated expectations in the immediate aftermath of the 17 October monetary policy decision, expectations that ultimately subsided as it became apparent that they were rooted more in wishful thinking than anything else.

The ECB would remain data-dependent and decide anew at every relevant Governing Council meeting without pre-committing, she insisted today, slipping in the word ‘downward’ to confirm that rates were in any case still likely to be cut.

‘We are not anticipating x or y for the next monetary policy decision that we will take’, she said.

Had she stopped there, one could more easily argue that her intention was simply to discourage speculation about coming cuts in general, whether for x or y, rather than speculation specifically about y – i.e. a rate cut of a magnitude she, like most Council members, appeared to view sceptically.

However, she did not stop there, continuing instead by noting that ‘a lot is going to be clarified, we hope, in the next few months, not in the next few weeks’ and adding that high uncertainty had been a if not *the* focus of the Council’s deliberations.

For us, this suggests that the ECB’s willingness to set monetary policy in jumbo-sized steps should remain limited, not just in January (‘the next few weeks’), but beyond (‘the next few months’).

Admittedly, at Econostream there may be some confirmation bias at work; after all, we argued on Tuesday, not for the first time, that ‘if the baseline continues to more or less materialise, then we can see a measured, gradual approach to easing remaining the rule’. This we predicated in part precisely on the lack of clarity about euro area inflation that will persist into 2025.

Confirmation bias or not, nothing about today’s decision, the monetary policy statement, the updated macroeconomic forecasts or Lagarde’s performance called this interpretation into question.

True, the ECB ditched the sentence of the monetary policy statement vowing to ‘keep policy rates sufficiently restrictive for as long as necessary’. As Lagarde said, ‘restrictiveness goes, appropriate determination replaces it’.

This was not unexpected, though, and in no way should be the basis for another bout of overdone market expectations about the way the ECB wishes to proceed.

One can understand Lagarde’s frustration, if indeed there was an element of this in her comments, that markets would insist on a vision of ECB policymaking in a manner that only a small (albeit vocal) minority of the Council favours.

Lagarde did an adept job at justifying her scepticism about 50bp even as she underscored the conviction that disinflation was ‘really on track’. The date at which the ECB’s 2% price stability target would be reached ‘has moved a little bit forward in the course of 2025’, she said, avoiding any appearance of jubilation. ‘Suffice it to say that in 2025, we will be at 2%.’

At the same time, she made sure to affirm that the ECB’s work was not done and that it was not yet the moment to declare victory. Even if risks to inflation were ‘more two-sided than they were before’, service sector inflation was still ‘running high’ and domestic price pressures in general remained elevated, she said.

The ECB would ‘really want to see a change in the composition of inflation to feel totally confident’, she said.

For anyone insisting that there was something about today that would justify a more dovish outlook, we would note additionally that Lagarde indicated that the neutral rate, for which she offered a range based on ECB research from 1.75% to 2.5%, was currently ‘probably a little higher than what it was before’. Shades of hawkish comments recently by Executive Board member Isabel Schnabel. 

All in all, we are left expecting from the ECB more of what we got today and predicted on Tuesday, namely an interest rate path ‘paved with 25bp cuts at every meeting unless an unexpected development compels acceleration.’