January 17, 2024 (MLN): The European Central Bank (ECB) is likely to cut interest rates in the summer, according to ECB President Christine Lagarde as reported by Bloomberg.

In an interview at the Bloomberg House in Davos by Francine Lacqua, she was asked if there could be majority support for such a move, given that several policymakers have signaled that timing.

“I would say it’s likely too,” Lagarde said. “But I have to be reserved, because we are also saying that we are data dependent, and that there is still a level of uncertainty and some indicators that are not anchored at the level where we would like to see them.”

Just a day before the start of the so-called quiet period that precedes ECB monetary-policy meetings, the president is joining many of her colleagues in seeking to damp expectations of imminent loosening, while acknowledging that officials are on a path to ultimately lower borrowing costs, Bloomberg reported.

“You’ve talked to some of them, they have spoken recently, and each of them has their view, which I respect completely,” Lagarde said.

“We generally coalesce towards the decisions that we make on the basis of data. Some of them have their local domestic data, they have their respective inflation rates, which are different from one country to the other.”

While the president recognized how consensus is forming, she also said that market bets on aggressive rate cuts are a distraction, Bloomberg added.

“It is not helping our fight against inflation, if the anticipation is such that they are way too high compared with what’s likely to happen,” Lagarde said.

Money markets responded to her comments on Wednesday by paring the extent of cuts expected from the ECB this year.

They now see 140 basis points by year end, equivalent to five quarter-point moves, with a 60% chance of a sixth.

Traders were fully pricing in six reductions at the end of last week. There’s also less conviction that the first move will come as soon as April, seen as a certainty until now.

Dutch central-bank chief Klaas Knot, speaking concurrently on CNBC, chimed in his view on investor bets.

“Markets are getting ahead of themselves, it’s pretty clear, and the problem for us is that in the end that might become self-defeating,” he said.

“We are optimistic that we have a credible prospect of a return of inflation to 2% in 2025 but a lot still needs to go well for that to happen.”

Lagarde acknowledged too that officials need more evidence before they can be sure that consumer prices are under control.

“We are on the right path, we are directionally towards the 2%, but unless and until we are confident that it is sustainably at 2%, medium term, and we have the data to support it, I’m not going to shout victory,” she said. “Not yet.”

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Posted on: 2024-01-17T13:19:36+05:00