FRANKFURT (Reuters) – The European Central Bank (ECB) can give itself time to assess the effectiveness of its fight against inflation, but it is not yet over and bets based on data are short term are incorrect, said ECB President Christine Lagarde on Tuesday.
Inflation has fallen more than expected in recent months, encouraging markets to bet that the ECB’s next move would be a rate cut, which could come as early as April even as monetary policymakers warn they could take more time.
“This is not the time to declare victory,” Christine Lagarde said during a speech in Berlin. “We must remain focused on returning inflation to our target and not draw premature conclusions from short-term developments.”
Markets now expect the ECB’s next rate decision to be a cut, which would take place in April or June. All rate cuts in 2024 would exceed 90 basis points.
Christine Lagarde said earlier that interest rates could remain stable over the “next two quarters”, while Bank of France Governor François Villeroy de Galhau said it would be necessary to wait “a few quarters” .
“We will have to remain attentive to the risks of persistent inflation,” Christine Lagarde said at an event with German Finance Minister Christian Lindner, adding that price growth could accelerate in the coming months.
The rapid growth of nominal wages constitutes a major risk for inflation, even if the ECB sees it for the moment only as a “catch-up” after the erosion of real income linked to inflation.
The ECB will now pay attention to how companies pass on wage increases to their margins, to the evolution of tensions in labor markets and to the anchoring of long-term inflation expectations.
“We will have to remain vigilant until we have solid evidence that the conditions are met for inflation to return to the target sustainably,” declared Christine Lagarde.
(Reporting by Balazs Koranyi, written by William Maclean, French version Corentin Chappron, edited by Tangi Salaün)
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