FRANKFURT (Reuters) – The European Central Bank has time now to assess how inflation unfolds after a record string of rate hikes but victory has not yet been won and bets based on short term data flow are premature, ECB President Christine Lagarde said on Tuesday.
Inflation has dropped more than expected in the past several months, fuelling markets’ expectations that the ECB’s next move is set to be a rate cut and could come as soon as April, despite guidance from several policymakers about a more drawn out timeline.
“This is not the time to start declaring victory,” Lagarde said in a speech in Berlin. “We need to remain focused on bringing inflation back to our target, and not rush to premature conclusions based on short-term developments.”
Markets now expect the ECB’s next move to be a rate cut in either April or June and see more than 90 basis points of easing before the end of 2024.
Lagarde earlier said interest rates could steady for the “next couple of quarters” while French central bank Governor Francois Villeroy de Galhau said it could be a “few quarters.”
“We will need to remain attentive to the risks of persistent inflation,” Lagarde said at an event with German Finance Minister Christian Lindner, adding that price growth could actually accelerate in the coming months.
A key risk for inflation is rapid wage nominal wage growth, even if the ECB so far only sees a “catch up” process after workers lost real incomes to the inflation surge.
The bank will now watch whether firms absorb wage increases via lower profit margins, whether labour market tightness eases and if expectations for longer-term inflation remain anchored around the ECB’s 2% target.
“We will need to remain attentive until we have firm evidence that the conditions are in place for inflation to return sustainably to our goal,” she said.
(Reporting by Balazs Koranyi, Editing by William Maclean)
