According to European Central Bank’s (ECB) President Christine Lagarde’s statement, the bank will not be discussing the numerical inflation target or disclosing interest rate projections during its upcoming strategy assessment.
When the ECB concluded its most recent major review in 2021, it announced the 2025 exercise.
However, Christine Lagarde clarified that this will not be another comprehensive review, but rather an interim evaluation of the current strategy.
“We have deliberately excluded any discussion concerning the symmetric 2% medium term (target), so the inflation target will not be debated. It can be debated, you know, in the future by a future president of the ECB but not on my watch,” Christine Lagarde said, as reported by the Zawya.
The European Central Bank sets its inflation target at 2%, but some analysts and decision-makers have argued that it should be more accommodating to deviations, especially when inflation falls short of the target.
Christine Lagarde added that the ECB will not discuss adopting the US Federal Reserve’s “dot plot” technique.
Individual interest rate projections made by Federal Reserve policymakers are displayed as dots on a graph to show market participants where rates might be headed.
“The other item that also we will exclude is the discussion of the dot plots, given the experience that some of my colleagues have had of this element,” Christine Lagarde noted.
Earlier in 2024, German ECB board member Isabel Schnabel proposed the idea of making public a dot plot of policymakers’ projections, claiming it would better inform markets.
According to Christine Lagarde, the strategy assessment will begin in the second half of 2025 and conclude rather quickly.
While the ECB has kept its interest rates unchanged, it said September 2024’s meeting was “wide open” as it downgraded its view of the euro zone’s economic prospects and predicted that inflation would keep on falling. The ECB cut rates from record highs in June in a move that even some of its policymakers considered rushed given stalling disinflation, and the bank is proving more cautious about a follow-up step.
There were a few hints to support investor bets on another reduction in September, however, including Christine Lagarde’s comment that risks to growth were “tilted to the downside,” a change to her previous formulation that they were balanced, at least in the near-term. However, she now believes that the overall growth was likely to have slowed in the 2024 Q2 and that investment activity along with poor industrial output point to muted expansion ahead.
“We would conclude that a September cut remains firmly on the agenda,” JPMorgan economist Greg Fuzesi said.
Christine Lagarde’s comments reinforce expectations that weak activity will continue to suppress price pressures in the economy, allowing the ECB to cut rates further, perhaps once a quarter.
“The ECB has burnt itself repeatedly by providing overly specific guidance, so this time Lagarde said the bank would not pre-commit to any rate path and data would guide decisions,” reported Reuters.
“So the question of September and what we do in September is wide open,” said Christine Lagarde, who also chose not to repeat a comment she made after June’s rate cut that there was now a “strong likelihood” the dialling back of monetary policy was underway.
Some also took her comments on wages as a modest hint that further policy easing is coming.
“While wage growth remains high, anaemic activity and already settled wage deals point to a slowdown ahead and income growth is expected to be consistent with the ECB’s inflation target next year,” she stated further.
“We read all this as another sign that the ECB retains a dovish bias as it eyes a soft landing,” TS Lombard economist Davide Oneglia said.
“Leading indicators remain consistent with more service disinflation in the second half, warranting at least another couple of cuts to avoid real rates from becoming progressively tighter,” the expert noted further.