ECB's path to rate cuts: caution ahead, data is king
ECB President Christine Lagarde's latest statement suggests that the ECB needs more data to ensure that inflation falls back to its 2% target level before it lowers rates further.
In a speech on Thursday, European Central Bank (ECB) President Christine Lagarde said that while the process of cooling inflation in the eurozone continues, officials must remain vigilant and need to pay particular attention to rising service prices driven by rising wages. She emphasized that the ECB needs to further ensure that inflation returns to the 2% target level before it will consider further interest rate cuts.
Lagarde pointed out that many ECB officials were reluctant to commit to further rate cuts after last month's rate cut due to the high rate of service price growth. She re-emphasized that the current rise in service prices is driven by rising wages and that this trend needs to be closely monitored.
Cautious rate cuts, data-driven decision-making
Earlier this week, Lagarde had noted that higher services inflation would mostly be hedged by lower goods inflation. She said that the ECB did not need to let service inflation growth fall to 2% and that it would eventually achieve a balance between goods and service prices.
While eurozone inflation slowed slightly last month, many are concerned about rapid wage growth and geopolitical pressures. Most ECB officials are supportive of one or two more rate cuts this year, but they emphasize the need for caution and the unlikelihood of a rate cut at their next meeting (July 17-18th).
Rate cut time point is still uncertain
Lagarde repeatedly emphasized that time is needed to assess the lingering uncertainty in consumer price action. Several other management committee members also said that the decision to adjust rates should be made only when there is more available information.
Speculation is that the ECB will only consider a rate cut at its quarterly outlook meeting, where it publishes new economic forecasts. In response, Lagarde seemed to give ambiguous signals in her speech on Thursday. She said the ECB needs a lot of data, which could come at any meeting, but it has to be based on a strong set of data.
Data dependence, not data point dependence
It's worth noting that on Monday, Lagarde was much clearer. She said that officials' assessment of the inflation outlook was "based on, but not limited to, our forecasts" and would not be swayed by any particular data point.
ECB Governing Council member Gediminas Simkus also said that rate action should not be limited to meetings where forecasts are released.
The ECB has remained cautious on rate cuts, emphasizing data-driven decision-making. While most officials support further rate cuts this year, the exact timing remains uncertain. The ECB will pay close attention to inflation data, especially the trend of rising service prices, and make decisions based on the data.
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