From Vilnius, where she took part in an event to celebrate ten years since Lithuania joined the euro, ECB President Christine Lagarde said yesterday that “if the incoming data continues to confirm our basic forecasts, the direction of travel is clear and we expect to further lower interest rates.” From his point of view, it is no longer justified to keep the cost of money at a “sufficiently restrictive” level given the weakness of economic growth. And he added that the European Central Bank currently places the neutral rate (the one that does not give rise to either an expansionary or restrictive monetary policy) between 1.75% and 2.5%. We asked Luigi Campiglio, Professor of Economic Policy at the Catholic University of Milan, for comment.
Professor, what do you think of these statements by the President of the ECB?
Evidently there must have been a change of heart, because until the other day it seemed that a further reduction in rates could be ruled out in the short term. I therefore believe that this is good news: they will be able, as happened already this year, to reduce the costs of credit and mortgages, freeing up resources for consumption, especially of durable goods. The construction sector in particular could benefit. I can’t say what the element that led to this change of heart could have been, whether it could all be traced back to the situation in France, also given the rating cut made by Moody’s on its sovereign debt last Friday.
In the statement released afterwards last Thursday’s Board of Directors meeting it was explained that the ECB’s monetary policy remains restrictive. Now Lagarde has highlighted that this level of rates is not justified given the weakness of growth. So, are we taking note of the situation in the real economy?
I think so. In these situations, among other things, there is also the risk of arriving too late. We probably took note of the European economic situation and tried to create a positive effect on expectations, through a message on the reduction of rates, which was not too far in time, given that monetary policy decisions unfold their effects after not a short time after their approval.
Lagarde hinted that a debate on the level of the neutral rate could soon begin. What do you think of the range indicated by the ECB?
It is not easy to identify this rate which should be compatible with an economy running at full capacity without problems relating to the lack of use of its production capacity. It must also be said that there is always the danger that a slight rise in inflation could slow down the path towards reaching the neutral rate.
Last month the Governor of the Bank of Italy Panetta he said that, if necessary, rates should be brought below the neutral level, thus applying an expansionary monetary policy. What do you think?
I think that in this case it should be a cautious expansionary policy. And it cannot be ruled out that we will get there if we look at how the ECB’s position has changed over the course of this year. Perhaps we also looked at the different production dynamics existing between the United States and Europe.
It could happen some problem what if the ECB cut rates faster than the Fed?
It may be that the trend in inflation in the United States leads the Fed to cut the cost of money less quickly. There is a margin of tolerance, but if the gap between the ECB and Fed rates were to widen too much, an exchange rate risk could be generated that would be unfavorable, given that it would strengthen the growth chances of the United States by taking away capital from the euro area. euro.
Taking into account the situation of the European economy and the unknown tariffs of the new Trump Administration, how much should the ECB cut rates in the first part of 2025?
Making predictions is always difficult. I think that the optimal policy is not to spread the cuts over too long a time. Therefore, even small rate reductions are fine, as long as they are frequent.
(Lorenzo Torrisi)
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