ECB rates will continue to fall, predicts Christine Lagarde

The President of the European Central Bank Christine Lagarde announced this Monday, December 16, that she was planning further rate cuts, following on from the easing already launched several months ago, in the face of advanced disinflation and increased risks to growth. “If the data that arrives continues to confirm our base scenario”which forecasts a return of inflation to the target of 2% during 2025 in the euro zone, then “the direction is clear: we plan to lower interest rates further”declared Christine Lagarde during a speech in Lithuania, in Vilnius.

“Current monetary policy remains restrictive”she said beforehand, although the ECB lowered its reference rate last Thursday for the fourth time since June, bringing it to 3%. 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.

Several declines anticipated in 2025

The markets anticipate several rate cuts by the ECB 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 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”declared Christine Lagarde.

The ECB has therefore adjusted its communication: 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 about its future trajectory. At its last monetary policy meeting of the year last Thursday, the ECB withdrew the term “restrictive”. Confident of a return «durable» inflation in the highlights of her mandate, she now wants to put in place a policy “appropriate” on rates, based on economic data. It is possible to “return to a situation where the (monetary) policy horizon can adjust according to the nature, scale and persistence of shocks, as needed”concluded the first guardian of the euro.