Further interest rate cuts? Lagarde warns against too high expectations

Further interest rate cuts?
Lagarde warns against too high expectations

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ECB President Lagarde defends the first interest rate cut in almost five years against all criticism. At the same time, she makes it clear that there may not be any further interest rate cuts any time soon. She also stresses that the central bank is still pursuing a restrictive course.

After the interest rate turnaround, ECB President Christine Lagarde is dampening expectations that there will be further easing measures quickly. The European Central Bank (ECB) made the right decision by cutting interest rates, Lagarde told the newspapers “Expansión”, “Handelsblatt”, “Il Sole 24 Ore” and “Les Echos” in an interview. But that does not mean that interest rates are on a linear downward path. “There could be times when we keep interest rates the same again.” And according to Lagarde, this could take longer than just one interest rate meeting. “That is a possibility,” she said in response to a question on this.

On Thursday, the Eurozone central bank lowered interest rates for the first time in almost five years. The deposit rate, which is the key rate on the financial market and which banks receive from the central bank for parking excess funds, was reduced by 0.25 percentage points to 3.75 percent. However, inflation in the eurozone rose slightly again in May to 2.6 percent from 2.4 percent in April.

The ECB is aiming for a target of 2.0 percent. One of the reasons for the increase is that inflation in the services sector has recently proven to be very persistent. According to insiders, monetary authorities consider a further interest rate cut at the next interest rate meeting on July 18 to be unlikely.

Bundesbank President Joachim Nagel called for a cautious approach. Decisions must be made from meeting to meeting depending on the data. The head of the Slovakian central bank, Peter Kazimir, said that he does not expect another interest rate cut in the summer. He drew attention to the interest rate meeting on September 12.

“Restrictive monetary policy cycle not yet over”

The ECB needs more data on wages and corporate profit growth and how these absorb part of the labor costs, as well as more data on productivity, said Lagarde. “These are important drivers of inflation in the services sector, which is our weak point.” Services prices in the eurozone rose by 4.1 percent in May, after 3.7 percent in April. That was the highest increase since the beginning of the year. The monetary authorities are also concerned that the growth in collectively agreed wages in the first quarter was stronger than expected at 4.7 percent.

The central bank must look at how labor costs develop, said Lagarde. “And we must ensure that profits continue to absorb the increases that are already there.” In the interview, the ECB president also emphasized that the central bank is still on a restrictive course. “First of all, we have not yet ended the restrictive monetary policy cycle,” she noted.

A central bank’s restrictive course is understood to mean an interest rate policy that slows down an economy. “If you look at real interest rates, we are still in a restrictive area and we must continue as long as necessary to bring inflation back to two percent,” said Lagarde.

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