risky isolated intervention without inflation progress

The President of the European Central Bank (ECB), Christine Lagarde, wore a necklace with the words “in charge” during Thursday's press conference, meaning “responsible” or “in control” in Italian. The path of the Frankfurt institution, despite Lagarde's attempts to demonstrate security after the first rate cut, promises to be bumpy, with unclear prospects and with i Eurozone central bankers divided.

On Friday, several members of the ECB Governing Council confirmed that the rate cut was decided the day before it will remain isolated in the absence of data confirming the decline in inflationwith this prudent attitude which curbed the hopes of those who imagined a rapid path towards a reduction in the cost of money.

The decision

On Thursday the ECB just approved the first interest rate cut since 2019, despite the inflation expectations remain high, partly to fulfill a promise that many bankers had made in public in previous weeks. However, the message was accompanied by considerations of the persistence of domestic inflation and wages, which confused the market.

“There ECB respects predictions, but overturns expectations – noted Sandra Rhouma, European Economist at AllianceBernstein – As widely expected, in fact, today the Governing Council of the European Central Bank cut the reference rates by 25 basis points. Despite this, the hopes of those who wanted a dovish ECB seem to be receding: the Eurotower has made it clear that it will maintain a restrictive policy for the rest of the year, and will not commit to defining a specific trajectory for rates in the future”.

“I'm sure you will hear some of my excellent colleagues express their point of view,” Lagarde said at the press conference. “The rate reduction cycle will 'take this amount of time' or 'will move at this speed.' I would like warn against any conclusions of this type.”

Bankers' comments

Indeed, the comments the next day did not offer much guidance on the timing of the next cuts or the entire path of monetary easing, but they certainly confirmed that it is difficult to find a safe route in this highly uncertain macroeconomic environment.

Robert Holzmanngovernor of the Austrian central bank and the only one opposed to the rate cut decided by Frankfurt, said that “considering it as a hawkish cut suggests that we will act with greater caution in the future”. According to Holzmann, the risk of a second wave of inflation is minimal, but inflation is stickier than expected. The central banker hopes “the future will be data-driven”.

“Even though inflation has been pushed to a fairly low level, victory is not yet within reach,” he said instead Martins Kazakhs, President of the Central Bank of Latvia. “Further reductions in interest rates are expected to be gradualclosely following the dynamics of wage growth, productivity growth and profit margins of companies,” he underlined.

Gabriel Makhlouf, governor of the Bank of Ireland, said that “we are now confident that the disinflation process is working. That is it does not incidentally mean that we know how quickly we will move forward or if we won't do it because – this is the phrase we use – the road is bumpy”. Furthermore, “in some sectors of the European economy, particularly in services, we have seen much stronger inflation and much stronger wage growth – he added – So the pace of the disinflation process is not entirely clear, but at least it's working, so we're more confident.”