ECB’s Lagarde says disinflation in eurozone will be bumpy
THE European Central Bank (ECB) is confident that it is on the right path to return inflation to 2 per cent, even though progress in the next few months will be bumpy, according to president Christine Lagarde.
That optimism allowed policymakers to lower interest rates last week, she told reporters in Dubrovnik, Croatia. She refused to comment on financial market turmoil originating in her native France, where stocks and bonds tumbled amid political uncertainty.
“We do have plenty of challenges, but I really believe that we are now heading towards a disinflationary path that will have its little hiccups here and there – what we call bumps on the road,” Lagarde said on Friday (Jun 14). “But it’s definitely on a declining path.”
Despite such confidence, officials are wary of plotting a course for interest rates following last week’s initial cut. Uncertainty over inflation stemming from wage growth, geopolitical tensions and the plans of other major central banks remains high, and consumer prices as well as recent gauges of workers’ pay have overshot.
The ECB projects inflation to return to 2 per cent in the final quarter of next year. Lagarde added: “Unless we have a major shock, or unless we have downside risks that materialise in the next few months, this is the direction of travel”.
Looking further ahead, Lagarde said inflation will be fuelled by factors outside of the business cycle.
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“It will also be driven by a pair of major structural forces that we have next to no experience of: geopolitical fragmentation and climate change,” she said later on Friday in a speech. “The evidence we have so far suggests that the new types of shocks we are facing are likely to put upward pressure on prices, at least initially.”
Earlier in the day in Dubrovnik, Portugal’s Mario Centeno – usually one of the ECB Governing Council’s most dovish voices – called for prudence in reducing borrowing costs further. His Slovenian counterpart, Bostjan Vasle, said rates would not be lowered at that same rapid pace they were lifted.
Markets have taken note. Bets on monetary loosening have been scaled back, with just one more cut fully priced this year. Latvian central bank chief Martins Kazaks has described investor wagers as “reasonable”.
Asked about concerns in financial markets that snap elections in France could produce a government favouring looser fiscal policy, Lagarde said she did not want to comment on domestic political situations.
“I will simply say that it is the duty of the European Central Bank to deliver on its mandate, and to keep inflation under control and back to target... is what we’ll be doing,” she said.
ECB officials see no cause for alarm in the market turbulence that has engulfed France in the past few days, according to people with knowledge of the matter. BLOOMBERG
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