There ECB takes its time on a new rate cut and excludes a repeat at the end of July, after the 25-point reduction announced in June. The pause is motivated by considerations on price stability and those, largely connected, on financial stability, which at this time also discounts the risks associated with the French elections. Even the Fed is stallingin this case on the first rate cut, because US inflation has proven more persistent than expected, and it does not plan to intervene before September.
Lagarde and the French Revolution
The President of the ECB Christine Lagardespeaking at a Portuguese central bank event in Sintra, confirmed that “the economy is going through a profound change” and “lack of certainty” is the main challenge that policymakers are facing.
“Our work is not finished and we must stay alert“, reiterated the President of the Eurotower, recalling that inflation has collapsed and reiterating “we will not stop until the game is won and inflation has returned to 2%”. Just yesterday, Eurostat, the EU’s statistical office, certified a further drop ininflation at 2.5% in June from 2.6% in May, but according to Lagarde, a return to the 2% target is not expected before 2025.
The ECB’s number one admitted that “we are very far along in the disinflation process”, specifying that the rate cut “is not a linear process nor a predetermined path”, but happens “a step at a time”.
Answering a question about theimpact of the French elections on monetary policy decisions, Lagarde admitted that there is an indirect link. “I will not comment on the political situation of any of the member states, especially those facing elections. But the ECB has to do what it has to do. Our mandate is price stability,” the President recalled, specifying “price stability depends on financial stability and we are attentive to this because it’s part of our job and we will continue to do it.” And he didn’t even rule out Activation of the anti-spread shield (or TPI – Transmission Protection Instrument) if necessary in the event of a disorderly reaction by the markets after next Sunday’s runoff.
Powell remains more hawkish
Even the Chairman of the Fed, Jerome Powell, spoke at the ECB Forum in Sintra and admitted that “inflation will not return to 2% this yearbut perhaps at the end of next year or in 2026″. Statements that seem to extend the timing of the first rate cut, even if the number one of the US central bank was keen to specify “in the first quarter of this year we have made progressthe latest readings suggest that we are returning to a disinflationary dynamic, but we want to be more confident“.
“Monetary policy is restrictive and will remain so”Powell further clarified, adding “I will not give a date” on future interest rate cuts. “We know that if we move too soon, we can undo the work that has been done, and if we move too late, we could do more harm than necessary to the economy. So we take those two risks into account,” the banker stressed.
“We want to see more data like what we’ve seen recently,” Powell concluded, confirming a totally “data oriented” monetary policyThe latest earnings data for May showed inflation falling to 3.3% from 3.4% previously, but still well above the 2% target.
