At the press conference on Thursday, the head of the European Central Bank, Christine Lagarde, wore a necklace that said “in charge.” However, her secrecy highlighted how difficult it is to reach consensus when the outlook is uncertain and policymakers are divided.
Despite higher inflation expectations, the European Central Bank had just implemented its first interest rate cut since 2019 in part to keep a promise that many policymakers had made public after agreeing to it behind closed doors.
However, there were caveats in the message about wages and domestic inflation remaining strong, and when Lagarde was asked if more cuts would be made, she gave an answer that some market participants were unsure of.
Her prudence exemplifies the difficulty Lagarde faces in communicating and maintaining consensus among the ECB’s 26 rate-setters, some of whom regretted agreeing to Thursday’s rate cuts weeks in advance.
According to Erik F, “members of the Governing Council are all over the place, they can’t agree on the details, so she probably had no choice.” Nielsen, who advises UniCredit’s chief economist.
The prompt end result is that the ECB has multiplied down on its “information reliance” mantra: the thought that it won’t give direction about future arrangement moves yet choose at each gathering in view of approaching data.
As Lagarde acknowledged on Thursday, there are approximately a dozen national central bank governors and board members who voice their opinions and preferences nearly daily. Lagarde stated, “I’m sure that you will hear some of my excellent colleagues take their position.” “It (the rate-cutting cycle) will ‘take such time’, or it will ‘move at such speed’. Any such conclusion should be avoided, in my opinion.”
A few policymakers who spoke on condition of anonymity said just hours after the meeting that rates would probably stay the same at the next meeting of the ECB in July, with the focus now shifting to September.
EITHER A DEAL OR NOT
As part of a deal mediated by Lagarde that brought together doves already clamoring for policy easing with hawks calling for caution, ECB rate-setters agreed to signal that a rate cut was likely this month as early as their March 7 meeting. After all, inflation had dropped dramatically, from more than 10% in late 2022 to close to the ECB’s target of 2%, as the economy stabilized following a price squeeze following Russia’s invasion of Ukraine and the COVID-19 pandemic’s end. However, progress has stalled, and rising wages threaten to increase inflation once more. This makes it harder to defend the ECB’s rate cut on Thursday and raises questions about what will happen next.
The U.S. Due to similar “stickiness” in inflation, the Federal Reserve has already postponed its rate-cutting plans, and strong job growth in the United States in May is likely to keep them on hold until September at the earliest.
According to Dutch bank ING’s global head of macro, Carsten Brzeski, the ECB may even have to reverse Thursday’s rate cut, as it did with ill-timed hikes on the eve of the financial crisis in 2008 and the sovereign debt crisis in 2011.
“There’s a gamble the ECB could encounter a ‘switch Trichet second’,” Brzeski expressed, alluding to the ECB’s then-president Jean-Claude Trichet. Lagarde was reserved when inquired as to whether the ECB would keep on toning down its steepest-at any point succession of rate climbs, presumably pondering wandering perspectives the Overseeing Chamber. “Are we currently entering a phase of dialing back?
I wouldn’t chip in that,” she said on Thursday. “Is the toning down process in progress? There is a good chance.”
That message, according to UniCredit’s global head of research Marco Valli, was unclear, and Dutch broker AFS analyst Arne Petimezas called it confusing.
Petimezas wrote, “I still don’t know if she wanted to suggest that the likelihood of additional cuts is high or low or that the ECB will be on hold for a long time.”
