ECB Rate Decision : Lagarde Provides Insight on Framework Review and Economic Trends: Stresses Data Dependence and Caution on Rate Cuts

Lagarde Provides Insight on Framework Review and Economic Trends: Stresses Data Dependence and Caution on Rate Cuts 

Lagarde, the head of the ECB, mentioned that the ongoing review of the framework is progressing rapidly. She advised against being overly fixated on changes in the wording of statements and stressed the need to be further along in the disinflation process before being confident about hitting the target.

Lagarde indicated the absence of second-round effects and expressed hope that wage increases would be sufficiently absorbed by profits. She acknowledged the directional positivity of wage growth. Lagarde observed a slight reduction in advertised job vacancies and noted some stabilization in the wage tracker. Additionally, she highlighted concerns about shipping cost increases and delivery delays.

Emphasizing a lack of fixation on a specific calendar, Lagarde mentioned the consensus at the table that being data-dependent is crucial. She reiterated standing by previous comments on rates and the consensus that it is premature to discuss rate cuts. Lagarde discussed the possibility of a faster decline in inflation if energy prices evolve in line with recent downward shifts.

Geopolitical tensions in the Middle East were identified as an upside risk to inflation. Lagarde mentioned that longer-term inflation expectations mostly hover around 2%, while domestic price pressures remain high, although some measures have started to ease. She expects inflation to ease further over 2024.

Lagarde called for the prompt implementation of new budget rules and noted a slowdown in labor demand, despite a robust labor market. Some surveys point to growth further ahead, but incoming data signals weakness in the near term, with the economy likely stagnating in Q4.

The ECB's future decisions will ensure that policy rates are set at sufficiently restrictive levels for as long as necessary. Incoming information has broadly confirmed the previous assessment of the medium-term inflation outlook. Interest rate decisions will be based on the assessment of the inflation outlook, underlying inflation dynamics, and the strength of monetary policy transmission.

The ECB's Asset Purchase Programme (APP) portfolio is declining at a measured and predictable pace. Lagarde considers that key ECB interest rates are at levels that, if maintained for a sufficiently long duration, will make a substantial contribution to the ECB's goals. Tight financing conditions are dampening demand, and past interest rate increases continue to be transmitted forcefully into financing conditions.

Following the policy meeting, the ECB emphasized flexibility in reinvesting redemptions in the PEPP portfolio to counter risks related to the pandemic. Reinvestments under PEPP are intended to discontinue at the end of 2024. Over the second half of the year, the ECB plans to reduce the PEPP portfolio by an average of €7.5 billion per month. Full reinvestment of principal payments from maturing securities purchased under PEPP is intended during the first half of 2024. The ECB confirmed that the APP and PEPP portfolios are declining at a measured and predictable pace. Interest rates on main refinancing operations, marginal lending facility, and deposit facility will remain unchanged at 4.50%, 4.75%, and 4.00%, respectively. The ECB's future decisions aim to ensure that policy rates are set at sufficiently restrictive levels, based on the current assessment that considers interest rates at appropriate levels for the desired duration. The ECB's statement acknowledged a declining trend in underlying inflation, and today, it decided to keep three interest rates unchanged. The interest rate on the deposit facility remains at 4.00%, the marginal lending facility at 4.75%, and the benchmark refinancing rate at 4.50%.