PARIS (Reuters) – The key rate of the European Central Bank (ECB) could help bring inflation down to 2%, while it is at a record level, Christine Lagarde, President of the ECB, said on Monday, reiterating the position of the central bank which neither promises nor excludes further rate increases.
Monetary policymakers have given varying interpretations of this positioning over the past week, with some saying the next rate move will likely be lower, while the other saying the likelihood of another increase could be close to 50%.
“We consider that our key rates have reached levels which, maintained for a sufficiently long period, will contribute substantially to the rapid return of inflation towards our objective,” declared Christine Lagarde.
However, Christine Lagarde pointed to a slight softening in an otherwise resilient labor market, which is expected to contribute to disinflation after rapid growth in nominal wages kept pressure on prices.
“The labor market is finally starting to adjust, and will probably take a little longer to adjust,” she told the European Parliament’s Economic and Monetary Affairs Committee. “Job creation in the services sector is moderating and overall dynamics are slowing.
Markets are not pricing in further rate hikes as fears of an economic slowdown will take precedence over inflation. Investors also consider that there is little chance of a rate cut by next June and that a cut is almost entirely expected by July.
“Recent indicators show further weakness (of the economy) in the third quarter,” added Christine Lagarde.
The ECB will also complete the review of its operational framework for controlling short-term interest rates by next spring, added Christine Lagarde, the deadline for this exercise having initially been set at the end of 2023.
Christine Lagarde launched the review last December, saying it would be completed by the end of 2023, but ECB officials have hinted in recent months at a possible delay.
“Eurosystem services are analyzing the optimal long-term size and composition of our balance sheet and, consequently, the appropriate level of excess liquidity,” Christine Lagarde said of the review. “This is not a trivial issue, as it has implications for how we implement monetary policy.”
(Report by Balazs Koranyi, French version Corentin Chappron, edited by Nicolas Delame)
Copyright © 2023 Thomson Reuters