ECB to probably lift growth forecast next week, Lagarde says

[BRUSSELS] The European Central Bank’s new forecasts next week will probably feature a more optimistic outlook for economic growth, according to President Christine Lagarde. 

The 20-nation nation euro area has been more resilient than feared to the US tariff onslaught, Lagarde told the Financial Times Global Boardroom event. She highlighted that the European Union hadn’t retaliated to those measures, while the euro hasn’t depreciated and the labour market remained robust.

“In the last projection exercises, we have upgraded our projections,” she said on Wednesday (Dec 10). “My suspicion is that we might do that again in December.” 

Euro-area bonds bonds fell, lifting French 10-year yields to a nine-month high above 3.60 per cent before they quickly pared the move. Money markets now see a 40 per cent chance of a quarter-point interest-rate hike next year – up from 30 per cent on Tuesday.

Policymakers have grown increasingly convinced that borrowing costs can be left unchanged for the foreseeable future, thanks in part to the economy’s resilience. Gross domestic product grew 0.3 per cent in the third quarter, more than initially estimated. 

Lithuanian central-bank chief Gediminas Simkus said on Wednesday that he doesn’t see a need for further cuts, a shift from earlier comments that signals increasing conviction inflation isn’t going to drop much below the ECB’s goal. Executive Board member Isabel Schnabel said she’s comfortable with investor bets on the next move being a hike.

Such comments led investors to no longer expect any reductions from the Frankfurt-based central bank next year. The moves were mirrored across the world, with global bond yields rising to highs last seen in 2009 on expectations that rate-cutting cycles from the US to Australia may be ending soon. 

“With a track record of around 2 per cent inflation and a medium-term projection at 2 per cent, I would say again, that we are in a good place,” Lagarde said, describing the economy as as being “quite close to potential.”

The president also responded to a call by French President Emmanuel Macron for a new approach to monetary policy in the eurozone that focuses not just on inflation but also takes economic expansion and employment into account. In contrast to the US, the ECB’s primary mandate is to safeguard price stability. 

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Lagarde said “it’s a good debate to have and it’s interesting to consider a possible treaty change.” But she cautioned that the current framework already allows the institution to consider issues including growth, employment, innovation, productivity and climate change.

“The duty of a central bank and its leaders is to focus on the mission that was given to us by the governments at the time when they decided that the central bank had to organise the monetary order in a particular zone,” she said. “And we have a pretty clear mandate.”

Lagarde also offered a positive assessment on the latest EU attempts to use frozen Russian assets to fund Ukraine’s defence.  

The plan currently under discussion is “the closest I have seen to something that is in compliance with the international law principles,” she said. “If we can explain our position, as it stands, I believe that investors in euro-denominated assets and in Europe will appreciate that this is not a practice that we have to deprive people of their property or to remove sovereign assets because it suits us. It’s a very, very exceptional case.” BLOOMBERG