The European Central Bank (ECB) remains willing to sacrifice economic growth to keep prices in the euro zone at bay.
The institution chaired by Christine Lagarde decided this Thursday to continue with interest rates at 4.5%, a level unprecedented since 2001, despite having decisively lowered its inflation forecasts and confirming fears of an economic slowdown in the first half of 2024. “Since the last meeting of the Governing Council held in January, inflation has continued to reduce,” admitted the Frenchwoman, who justified the decision in “internal inflationary pressures”, which in her opinion “continue “still intense, due in part to strong wage growth.”
Lagarde has also dampened expectations of a first cut in April by maintaining that until June they will not have all the necessary data to begin to decide with greater “security.”
Frankfurt was stripped of any roadmap when the inflation crisis broke out, sending prices soaring above 10% in autumn 2022. Since then, the ECB has declared itself “data-dependent” when making decisions.
At this week's Governing Council meeting, the leadership of the institution has had new and valuable information, coming from the projections of its team of economists.
And these confirm that prices are moderating more quickly than expected, largely thanks to the fall in energy.
Specifically, the monetary authority predicts that average inflation this year will already be 2.3%, four tenths below the December forecasts and very close to the 2% mandate.
For 2025, a CPI of 2% is expected, and for 2026, 1.9%.
The abrupt rise in interest rates – which has not yet been fully reflected in the real economy – has meant greater difficulty in accessing credit, lower consumption and a cut in investment.
And this has happened in an environment of fragility of the euro zone economy, which continues to lose ground compared to the United States or China.
“It is still weak,” acknowledged Lagarde, who even so predicted a rebound starting in the second half of the year.
The ECB economists, in fact, draw a situation of stagnation for this year, with a poor advance of 0.6%, two tenths less than what they contemplated in December.
For 2025, the ECB projects an expansion of 1.5%, and for 2026, 1.6%.
The monetary authority continues without hesitation when faced with the dilemma of choosing between growth or inflation.
Lagarde has stated that the “disinflation” process is underway, even warning that “good progress” is being made.
However, he added that they need more data to be “sufficiently confident” that they will be able to return to a 2% price increase.
Specifically, the head of the ECB has stated that the Council wants to see the evolution of inflation linked to services and salaries, whose increases began to moderate in the last quarter of 2023, but which continue to worry the
hawks
.
For this reason, the ECB conclave unanimously resolved to maintain interest rates at 4.5% and the deposit facility at 4%.
The president of the European Central Bank (ECB), Christine Lagarde, and the vice president, Luis de Guindos, this Thursday in Frankfurt.Michael Probst (AP/ LaPresse)
No debate on cuts
The markets assumed that no movement would yet be decided in Frankfurt this Thursday.
However, they did harbor some hope of a first cut at the meeting next April, especially after the governors of France, Italy and Portugal advocated starting to collect cable now and after confirming the poor activity data that continues registering in Germany.
Lagarde has suggested that then will not be the time to lower the price of money either because they will not have all the necessary data.
What's more, he has maintained that a possible cut has not yet been discussed, but rather that discussions have begun on changing "its restrictive orientation."
The head of the ECB did not clarify, however, what the difference is between the two things.
Although Frankfurt no longer offers a roadmap for its actions, Lagarde has warned that the institution must go through stages before returning to normalization.
Now it is a time of “waiting”, which will be followed by a stage of restrictive policy and finally a return to interest rates that allow the economy to breathe.
Although price moderation has been more intense in Europe than on the other side of the Atlantic, markets believe that the Federal Reserve will once again lead the new cycle.
However, Lagarde has assured that the ECB will act “independently.”
“We will do what we have to do,” he has stressed.
Although Lagarde denied this Thursday that she had said that there is no rush to lower rates, the ECB continues dragging its feet to cut the price of money.
On the other hand, Lagarde does ask governments to quickly withdraw the aid they have launched to protect families and homes against the inflationary crisis that Frankfurt says may not have ended.
In addition, he has urged them to deploy the European recovery plan, adopt structural reforms, implement the capital union and adapt to the new community fiscal rules.
After the meeting, the markets believe that the institution will continue to take its time until cutting rates.
“Only an ECB much more alarmed by the growth outlook could trigger a rate cut as early as the end of April,” says Macro chief economist Carsten Brzeski.
“We expect the first rate cut to occur in June, once the Governing Council has had the first quarter wage data in view,” agrees Felix Feather, economist at investment bank Abrdn.
After the dissemination of Lagarde's note, the euro has appreciated against the dollar.
Sovereign debt yields have fallen, while the main European stock markets have closed with gains.
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