Commenting on today's decision of the European Central Bank to cut the key interest rates by 25 basis points, its president Cristine Lagarde noted that growth in the euro area is losing momentum. She highlighted that surveys indicate fewer jobs being created this quarter, though the economy is expected to strengthen over time, albeit at a slower pace than previously assumed. Lagarde emphasised that provided trade tensions do not escalate, exports should contribute to the recovery, and she called for swift action on concrete proposals to enhance competitiveness.
The ECB's boss also noted that underlying inflation is overall developing in line with a sustained return to the ECB's target, with most measures of longer-term inflation expectations remaining around 2%. Lagarde noted that inflation risks are now two-sided, citing trade tensions as a possible downside factor. She reiterated that the ECB will maintain a meeting-by-meeting and data-dependent approach, aiming for inflation to converge toward 2% by some point in 2025, as projected for six consecutive periods.
In addition, Lagarde admitted that past shocks have exerted downward pressure on inflation but pointed to more promising signs of productivity improvements.
While acknowledging discussions about a possible 50 basis point cut, she stressed that the neutral rate level was not discussed during the meeting. Lagarde added that she does not think about market pricing of rate hikes.
Regarding monetary policy, Lagarde noted that while the direction of travel for rates is currently clear, the pace remains uncertain. She underscored the significant progress already made, with 100 basis points of cuts implemented thus far, and indicated that the debate on the neutral rate will occur in due course.
Finally, Lagarde remarked that tariffs are not factored into the ECB's current projections and noted that variations in the exchange rate have an impact on inflation, and the ECB will monitor these developments closely.