ECB President Continues Cautious Approach, Warns of Stagflation and Economic Risks
In a press conference on Thursday, European Central Bank (ECB) President Christine Lagarde issued a cautionary note about the European economy, suggesting it had likely experienced stagflation in the last quarter of 2023. Lagarde outlined the risks of a further economic slowdown and highlighted the ECB's commitment to a data-dependent approach amid global economic uncertainties.
During the January meeting, the ECB kept interest rates unchanged for the third consecutive time, aligning with market expectations. President Lagarde refrained from providing explicit guidance on future rate movements, choosing instead to address the prevailing economic challenges in the euro area.
Lagarde began her remarks by acknowledging that the euro area economy likely faced stagnation in the final quarter of 2023, with short-term data indicating continued economic weakness. She emphasised the risks of a more pronounced economic slowdown, citing potential stronger-than-expected monetary policy impacts and further global economic or trade weakness.
On credit dynamics, Lagarde noted some improvement but highlighted that they remain generally weak. She mentioned that recent data aligns with the ECB's expectations, forecasting average inflation at 2.7% for 2024, decreasing to 2.1% in 2025, and stabilising at 1.9% in 2026.
Addressing speculations about interest rate cuts, Lagarde clarified that discussions on such measures are premature and must wait until the disinflation process progresses further. She emphasised the need for confidence that inflation will reach the target promptly before considering rate cuts.
Lagarde also addressed concerns about disruptions in the Red Sea trade, acknowledging increased shipping costs and delivery delays. While these factors contribute just over 1.5% to total transportation costs, she warned of potential broader impacts on energy and commodity prices if the situation escalates.
The ECB President emphasised the importance of monitoring wage trends, particularly in the context of service sector inflation, which has remained persistently high at 4%. Despite acknowledging the rise in wages, the ECB currently downplays the likelihood of these increases having a secondary impact on inflation.
Responding to questions about a potential recession in the euro area, Lagarde referred to varying definitions of recession and cited Janet Yellen's dismissal of recession claims in the US. Following the ECB meeting, money markets increased bets on rate cuts, anticipating a 50 basis point reduction by June and a 140 basis point cut by December 2024. Stronger-than-expected US economic growth in the fourth quarter of 2023 contributed to the euro's decline against the dollar.
In conclusion, Lagarde faces the challenge of managing market expectations for rate cuts amid a slowing eurozone economy. The ECB maintains a data-dependent stance, with the following crucial event being the ECB's meeting on March 7, where new economic projections will be unveiled in Frankfurt.