Lagarde: Next year may continue to ease policies to address political instability in the Eurozone and trade risks between the US and Europe

On Thursday, the European Central Bank cut interest rates for the fourth time this year. President Christine Lagarde shared her views on monetary policy, inflation, and the economic outlook at a press conference, stating that further easing of policies may be considered in 2025 to address political instability in the Eurozone and trade risks between the U.S. and Europe.

The Wall Street Journal summarized the key points from Lagarde's speech.

Monetary Policy and Interest Rates

Lagarde discussed the new policy wording. "We want to maintain appropriateness in our monetary policy decisions. If we use a comparative analogy, 'tightening' is no longer used, and 'appropriateness' has taken its place."

Lagarde revealed that there was some discussion about a 50 basis point rate cut, but there was a consensus that a 25 basis point cut was the right move:

"We held the last Governing Council meeting of 2024 and confirmed that, although we have not fully conquered inflation and cannot declare the mission accomplished, inflation is indeed gradually approaching the mid-term target of 2%. This gives us some confidence to decide on a rate cut and determine the appropriate magnitude, which is 25 basis points. This proposal received unanimous agreement from all Governing Council members."

When discussing the interest rate path, Lagarde stated, "We are determined to ensure that inflation sustainably stabilizes at the target level of 2% in the medium term. Our interest rate decisions will be based on assessments of economic and financial data, underlying inflation dynamics, and the strength of monetary policy transmission. We will not commit to a specific interest rate path."

The neutral interest rate cannot be precisely determined. The European Central Bank did not discuss the neutral interest rate this week.

On Inflation

Lagarde pointed out that inflation in the Eurozone remains high, but it is getting closer to the inflation target; however, it is not over yet, and the task of controlling inflation is not complete. She hopes that changes in inflation components will provide full assurance that the target is near.

Inflation is expected to fluctuate around current levels in the near term. Lagarde anticipates that by 2025, the inflation rate in the Eurozone will reach 2%, which is clearly reflected in the forecasts. Wage levels will align with the 2% inflation target. The underlying inflation rate will return to 2%.

Inflation risks are more two-sided than before:

• Upside risks: Geopolitical tensions may push up energy prices and transportation costs, disrupting global trade. Additionally, extreme weather events and the climate crisis could lead to food prices exceeding expectations.
• Downside risks: Low confidence and geopolitical concerns may suppress consumption and investment. If the monetary policy's dampening effect on demand exceeds expectations, or if the global economic environment unexpectedly deteriorates, inflation may fall below expectations.

Eurozone Economy and Labor Market

Lagarde believes that the latest information indicates that the Eurozone economy is losing momentum. The economic growth outlook faces downside risks. Economic growth will be slower than expected. However, over time, the economy is expected to strengthen. The government should focus on reforms that promote growth.

Regarding the labor market, Lagarde stated that demand for labor continues to weaken, but the labor market remains resilient. The increase in labor costs will slow down.

U.S.-Europe Trade Friction

Lagarde mentioned that escalating trade friction could weigh on economic growth. "The risks of global trade friction may drag down Eurozone growth by weakening exports and the global economy. More affordable credit should boost consumption, provided that trade tensions do not escalate "Trade friction will make the inflation outlook uncertain. The overall impact of tariffs on inflation remains uncertain, as it is a very complex situation involving many variable factors.

The uncertainty from the new U.S. government is not within the forecast baseline. 'The level of uncertainty we are facing is what we have discussed the most in recent days.'

Regarding Exchange Rates

Lagarde stated, 'We do not target exchange rates, but I am happy to reiterate that exchange rates and their fluctuations have an impact on inflation, and we are keeping an eye on this and will continue to monitor it in the coming weeks and months.'