Challenges Ahead for Inflation in Europe, Says Lagarde

The Latest Developments on the ECB Interest Rate Cut

The euphoria following the first ECB rate cut has quickly dissipated due to lingering uncertainties about inflation in the Eurozone.
ECB President Lagarde’s statements during the press conference on Thursday, June 6, were not entirely clear regarding the opaque outlook for the region’s inflation.
The day after, Lagarde reiterated that the ECB is far from defeating inflation and must continue to temper economic growth, as stated in an editorial on Friday.

Investors are now questioning the next steps in monetary policy, with speculation about further rate cuts in 2024.
Despite claiming that the prospects for consumer prices have “considerably improved,” the ECB raised its inflation forecast for 2025 to 2.2% from 2.0%, raising doubts about the adequacy of the move.

Did the ECB Make a Mistake by Cutting Rates? Lagarde’s Response

While on Thursday Lagarde indicated that there is a high likelihood that the rate cut is not a one-off event but the beginning of a dialback process, on Friday she seemed to adopt a more cautious stance.
“We still need to keep our foot on the brake for a while, although we are not pressing as hard as before,” she stated.
“Interest rates will therefore need to remain restrictive for as long as necessary to ensure price stability over the long term.”

In the bloc of 20 countries, inflation accelerated more than expected to 2.6% in May.
Of greater concern to officials was the surge in service prices and the unexpected strengthening of underlying pressures.

Last Friday, officials expressed cautious assessments of the prospect of further easing, seeking additional evidence of progress in price growth to be certain that new cuts are justified.
Ireland’s Gabriel Makhlouf stated that policymakers do not know “how quickly we will move forward, or if we will not.”

What Lies Ahead for the ECB’s Monetary Policy?

While most officials openly refuse to discuss the ECB’s next policy move, they have nearly ruled out a rate cut in July when speaking unofficially.
In addition to the recent string of bad news, wage growth per employee, a key measure monitored by the ECB, accelerated to 5.1% in the first quarter from the previous quarter’s 4.9%, according to data released on Friday, indicating even stronger wage hikes.

In her editorial, Lagarde emphasized that consumer price growth is on track to reach the 2% target in the latter part of 2025, with monetary policy “making a strong contribution” to this goal.
“Therefore, by cutting rates, we have decided to moderate the degree of monetary policy restriction,” she stated.

However, the return to the target “will not be a completely smooth path,” she added.
“It requires vigilance, commitment, and perseverance.” The next rate cut in the Eurozone may be far off.