SINTRA, Portugal (Reuters) – The European Central Bank needs more time to conclude that inflation is set on a path towards 2% and benign economic developments show that a rate cut is not urgent, the ECB president said on Monday , Christine Lagarde.
The ECB cut rates for the first time in June after its most aggressive rate-hiking spree on record, but stopped short of committing to any further moves, arguing the outlook was too uncertain to telegraph a second cut.
“It will take time for us to gather enough data to be sure that the risks of above-target inflation have passed,” Lagarde said at the ECB’s Central Bank Forum, the bank’s main policy conference.
“The strong labor market means we can take time to gather new information,” she added.
The ECB is trying to walk a narrow path, reconciling inflation uncertainty and weak growth. Uncertainty would prompt caution in cutting rates, but continued economic weakness strengthens the case for easing, pulling the ECB in opposite directions.
Lagarde acknowledged the dilemma, warning that it was still far from clear that the bloc would avoid a recession, despite a modest pick-up in growth last quarter.
“A ‘soft landing’ is still not guaranteed,” she said. “We also need to be mindful of the fact that the growth outlook remains uncertain.”
Growth indicators in recent weeks have come in on the weaker side of expectations, defying a widely held view that a year and a half of economic stagnation was over and a recovery was on the way.
However, investors are betting that inflation concerns will outweigh recession fears and the ECB will be very slow to cut rates, especially as the US Federal Reserve also signaled patience.
They now price between one and two more cuts this year and just four cuts between now and the end of 2025.
This is mainly because the inflation outlook remains very dark. Price growth is expected to hover either side of 2.5% for the rest of the year, before falling back to the ECB’s 2% target by the end of 2025.
While disinflation has been relatively rapid over the past year, high utility costs threaten to derail the process, and policymakers are now focusing on whether firms have begun to absorb rapid wage growth or continue to pass on higher wages to customers.
“We are still facing some uncertainty about future inflation, particularly in terms of how the earnings, wage and productivity nexus will evolve and whether the economy will be hit by new supply shocks,” Lagarde said. .
(Reporting by Balazs Koranyi and Francesco Canepa; Editing by David Holmes)
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