The European Central Bank has not yet won the match against high inflation, with the 2% target not expected to be reached before the end of 2025, its president Christine Lagarde warned on Monday. Eurozone inflation was brought down to 2.6% over a year in May, after peaking at 10.6% in October 2022. As a result, the monetary institution cut its rates in June for the first time in five years.
Nevertheless, ” we will not rest until the game is won and inflation is back to 2% “, the ideal rate targeted in the medium term, declared Christine Lagarde, the president of the BCE at the opening of an annual forum organized in Sintra, Portugal. Our work is not done and we must remain vigilant ” she warned at the beginning of her speech.
Given the unprecedented scale of the inflationary shock since the start of the euro, ” A soft landing for inflation is still not guaranteed “, according to the former managing director of the IMF.
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Uncertain continuation
While deciding on a first, widely anticipated rate cut in June, taking them off their historic high, the ECB warned that the future would be uncertain due to the volatility of inflation. While the shortages of goods following the Covid-19 crisis, a factor in inflation, seem to have been resolved, and the rise in energy prices in the wake of the Russian war in Ukraine is no longer weighing as much, “We still face several uncertainties regarding future inflation “, according to the central banker.
She quoted in this regard: the evolution of the link between profits, wages and productivity “, at a time when employees are getting wage increases to make up for lost purchasing power, and ” the question of whether the economy will be hit by further supply-side shocks ” without specifying their nature.
The ECB is indeed predicting a bumpy path for inflation in the coming months, with potentially higher energy prices and service prices influenced by the strong wage component. However, as already communicated in June, inflation is expected to reach 2% again. at the end of next year ” she added.
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Towards a next rate cut?
However, the prospect of a new cut is becoming less and less doubtful. Last week, the governor of the Bank of Slovakia reassured the markets. Although in favour of a strict monetary policy, he announced last Thursday: ” I think we can expect another rate cut this year. ».
While the governor’s statement suggests that a further rate cut by the ECB at its July 18 policy meeting is unlikely, it confirms that the European Central Bank has indeed entered an easing cycle.
Markets bet on three declines
For their part, the money markets are currently counting on a total rate cut by the ECB of 68 basis points this year, while the probability of a third cut after that of June and the one expected in September is around 70%.
The ECB could ” only reduce its rates once a quarter to bring the deposit rate back to 3.25% by the end of 2024 “, estimated Holger Schmieding of Berenberg at the beginning of June.
« We will surely have a second cut, at best in September, and if inflation continues to fall, we will possibly have another one in December. “, anticipated IG France analyst Alexandre Baradez, questioned by The gallery rather this month.
(With AFP)
