The European Central Bank runs the risk of adjusting its rates, currently at their highest, “too late” if it waits to have all the indicators to decide, its president Christine Lagarde warned on Wednesday.
With the gradual decline in inflation, the ECB is under pressure to begin a cycle of rate cuts because their record level is starting to weigh on economic activity.
ECB officials want to see how three key indicators – wage increases, company margins and productivity growth – will evolve to ensure that inflation is heading towards the 2% target in the medium termexplained Ms. Lagarde during a conference in Frankfurt.
But given the delays with which this data is available, “we cannot wait to have all the relevant information”, recognized the president of the institution. “By doing so, we would risk adjusting our policy too late,” she added.
A risk of suffocation of economic activity
High interest rates weigh on demand and investments, which helps reduce inflationary pressures but risks stifling economic activity. At its last Governing Council meeting, the ECB suggested that a first rate cut loomed in Juneopening a new chapter in monetary policy after the unprecedented series of increases launched since July 2022 to combat the surge in prices.
The rate on deposits, which serves as a reference, has been at its highest since October, at 4%. In the coming months, the ECB will reach a sufficient “level of confidence” for a “first political decision” on its rates, according to Ms. Lagarde.
The monetary institution will notably have at the end of May data on the negotiated growth of wages in the first quarter of 2024, and by June, economic projections likely to confirm its forecasts on the evolution of inflation. In March, the ECB said it expected price rise reaches 2% target in 2025after 2.3% in 2024, due to the weaker impact of energy prices.
If Ms. Lagarde suggested that rates could fall for the first time in June, the ECB cannot commit beyond a predefined number of cuts. “We cannot commit in advance to a particular rate trajectory” which will be decided during the meetings, said Ms. Lagarde. In March, a panel of analysts surveyed by the ECB forecast a rate on deposits reduced to 2.25% by the end of 2025.
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