"We will not let our guard down", assured yesterday the president of the European Central Bank (ECB), Christine Lagarde. There was anticipation yesterday as to whether the French would send any signal of a change in the current upward cycle of monetary policy.
He did not lack arguments. The US Federal Reserve on Wednesday already ruled out three rate cuts in 2024, after Chairman Jerome Powell expressed the risks of suffocating the economy for too long.
But above all, the ECB revised down the inflation forecasts for 2024 and 2025. A sign that not only has the worst of price growth passed in the eurozone, but that everything points to reaching the 'desired target of 2% earlier than expected. The ECB's forecasts for the coming years have been cut considerably, with inflation estimated at 5.4% in 2023 (from 5.6% estimated in September), 2.7% in 2024 against a previously estimated 3.2%, and 2.1% – theoretically the optimal level – in 2025, which it does keep unchanged.
It should be noted that the previous calculations were heavily influenced by energy prices, whose recent falls have impacted the projections released yesterday.
However, Lagarde said that at the meeting of the monetary policy council among the different members, "there was no discussion at any time of rate cuts". Because?
Because the data, in his opinion, are not conclusive. The labor market is stable, wages are rising and unit labor costs, in particular, have continued to rise recently. In addition, he recalled, half of the workers will have to renegotiate their wages in the first half of the year. Therefore, a rebound cannot be ruled out. In fact, in the short term the ECB indicates that inflation could rise again.
Lagarde feels comfortable in the current plateau where the price of money is. He also remembers that not even in the ECB table does it believe that there should be a recession, much less that the central bank should cause one through monetary policy. The interest rate on the main financing operations and the interest rates on the marginal credit facility and the deposit facility will remain unchanged at 4.50%, 4.75% and 4%, respectively. It is the highest level since the birth of the euro.
The president used a chemical metaphor to explain her stance. "We cannot pass from the solid state to the gaseous state without first passing through the liquid". In other words, the transition from an increase in the rate to a decrease must be gradual and a technical break must elapse between the two cycles.
After the statements of the Federal Reserve, which excited investors at the prospect of an upcoming reduction, it can be said that "Santa Claus did not arrive early in the euro zone", quipped Ann-Katrin Petersen, strategist from Black Rock.
Silvia Dall'Angelo, senior economist at Federated Hermes Limited, in a note issued yesterday, was critical of the ECB's excessive caution. "Once again, European central banks take time to react. Two years ago, they delayed their fight against high inflation too much. Now, they risk inflicting the severe pain of restrictive rates on their already stagnant economies.”
Tomasz Wieladek, economist for Europe at TRowe Price, emphasized that the problem holding back Lagarde is the persistence of underlying inflation. The forecasts of the ECB experts for the eurozone are 2.3% in 2025 and 2.1% in 2026.
“These forecasts are clearly above the 2% target and are a sign that the ECB will keep rates at the current 4% level for some time. In other words, it is the ECB's way of telling financial markets that too much importance has been placed on the weak 2.4% CPI data for November," this analyst wrote in a commentary.
As a novelty, the ECB announced yesterday that it intends to stop reinvestments under the PEPP (the public and private asset purchase program to counter the pandemic) at the end of 2024. "There is no longer an emergency sanitary The pandemic is over,” Lagarde said just before coughing. Yesterday, the French woman was still recovering from the covid she contracted recently. She was fine, but as she said herself, "we better not let our guard down."
