Lagarde issues caution regarding excessive optimism.
Christine Lagarde, President of the European Central Bank (ECB), defends the decision to lower interest rates for the first time in almost five years. Despite the criticism, she clarifies that additional rate cuts might not happen as quickly. She emphasizes that the central bank continues to follow a restrictive approach.
Lagarde dissuades the public from expecting quicker easing after the recent rate cut. During an interview with newspapers "Expansión," "Handelsblatt," "Il Sole 24 Ore," and "Les Echos," she expressed her confidence in the European Central Bank's choice. However, she clarified that interest rates are not expected to drop at a uniform pace. "There might be occasions when we keep the rates unaltered," Lagarde said, responding to a reporter's question.
On June 14, the ECB finally lowered its key interest rate to 3.75%, a decision it had not made since May 2019. The rate, which banks receive for parking excessive reserves with the central bank, was reduced by 0.25 percentage points. However, inflation in the euro area slightly rose in May, reaching 2.6% compared to the previous month's 2.4%. The ECB planned to maintain a target of 2.0%.
One reason for the increase in inflation was the persistently high inflation in the services sector. Highlighting the persistence of inflation in this segment, the ECB President said that central bankers do not foresee any immediate rate cut at the upcoming meeting on July 18.
Jens Weidmann, President of Germany's Bundesbank, urged a prudent approach. He stated that the decision should be taken case-by-case depending on the data. Marek Galia, the central bank governor of Slovakia, did not foresee any rate reduction before the coming summer. He mentioned the potential interest rate meeting on September 12 as a possibility.
"We still have a long way to go for a restrictive monetary policy cycle"
Lagarde noted that the ECB requires more data on wages, corporate profits, and their impact on labor costs, as well as information on productivity within the services sector. "These factors significantly influence the inflation trends in the services sector, which is our area of concern," she added. Services' prices grew by 4.1% in the euro area in May, a significant increase from the 3.7% rise in April.
The ECB is also concerned about the surprisingly high wage growth in the first quarter, which hit 4.7%. Lagarde vocalized the concern, saying, "We must pay attention to how labor costs are evolving. Additionally, we must ensure that profits continue to absorb the salary growth that already exists." In the interview, Lagarde reminded the public that the ECB is still adhering to its restrictive monetary policy approach. "We have not completed the restrictive monetary policy cycle yet," she explained.
The ECB's restrictive monetary policy involves taming an economy. According to Lagarde, real interest rates are still restrictive. "We have to continue in this restrictive area for as long as necessary in order to drive inflation back down to our goal of 2.0%," she said.
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Despite the recent interest rate reduction by the ECB, Christine Lagarde expresses caution against expecting quicker easing, stating that there might be occasions when rates remain unchanged due to the need for more data on inflation factors. Furthermore, Lagarde underlines the ECB's commitment to a restrictive monetary policy cycle, as real interest rates are still needed to drive inflation back down to the target of 2.0%.
