The European Central Bank will lower its interest rates again if disinflation is confirmed, declared Monday its president Christine Lagarde, who highlighted the risk of protectionism in the United States which could harm growth in the euro zone.
“If the arriving data continues to confirm our base scenario”, which foresees a return of inflation to the 2% target during 2025, then “the direction is clear: we plan to lower interest rates further” , declared the President of the European Central Bank (ECB) during a speech in Vilnius, the Lithuanian capital.
The ECB can afford to take this path because the environment in the euro zone has changed radically since the peak of inflation of more than 10% observed in the fall of 2022. Two years later, the concern relates more to “Weaker than expected growth prospects and increased uncertainty linked to geopolitical events,” Christine Lagarde said.
“Increasing geopolitical uncertainty could create new shocks in household sentiment,” which would slow down consumption, according to the leader.
In particular, “if the United States – our largest export market – adopts a protectionist policy, growth in the eurozone risks suffering,” she added.
To date, monetary policy “remains restrictive”, which means that the still high cost of money is penalizing the economy, she said beforehand. And this, although the ECB lowered its reference rate last Thursday for the fourth time since June, bringing it to 3%, after it reached its historic high of 4% in 2023.
The ECB’s key rates directly impact the borrowing rates applied by banks to businesses and households. By lowering them gradually, the monetary institute can stimulate growth while ensuring that this does not revive inflation.
The markets anticipate that the ECB will make several further rate cuts in 2025 to bring the reference rate to around 2%, i.e. a so-called neutral level which neither penalizes nor supports the economy. The ECB has put its communication in tune with the markets: it now says that rates no longer need to remain “sufficiently restrictive for as long as necessary”, a formula used since 2022 in a context of high inflation and uncertainty over its future trajectory.
According to the new formula inaugurated during its meeting on Thursday, the institution is confident about a “sustainable” return of inflation within the framework of its mandate and plans an “appropriate” policy on rates, based on economic data . It is once again “possible to adjust the horizon of monetary policy according to the nature, scale and persistence of shocks, as needed,” concluded the first guardian of the euro in Vilnius. .
Sami Nemli With Agency / ECO Inspirations
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