ECB’s Lagarde: Rate cut today is justified by confidence in the path ahead

• At each and every step of the way when we decide to move, we have halved inflation
• In October 2022, we were at peak inflation i.e. double-digit inflation
• In September 2023, we were at 5.2% inflation
• And today, we are at 2.6% inflation
• Policy decision and data releases are not perfectly synchronised
• Cannot say until much later in the summer if ECB will do something then or at another point in time
• We need more data to constantly confirm disinflationary path

When asked about the rate cuts priced in by markets, Lagarde only had this to say: “Markets do what markets have to do, and we do what we have to do.”

The rates pricing hasn’t really shifted by much following the decision. Traders were pricing in ~64 bps of rate cuts for this year, including today, and that is now seen at ~36 bps for the remainder of the year i.e ~61 bps in total.

• We will need more data to constantly confirm disinflationary path
• Can not confirm that dialing back process is underway.
• Were more restrictive in real terms and back in September
• There will be other bumps on the road. Some bumps can be anticipated, like base effects
• Not confident about magnitude of bumps
• Wages matter enormously
• We will still be looking at a multitude of data
• Wages are important when it comes to services and we know that services is an important item in the inflation index
• What is at the root of the services price is his predominantly wages.
• There is a divergence of wages in countries.
• We have to assume that wages will continue to be elevated, but are seeing wages on a declining path..
• Wage tracker remains elevated, but when we look at the flows, we are seeing a decline more recently.
• Decision almost unanimous part from one governor.
• Can not commit to deciding rates only at projection round meetings
• We have more data at projection round meetings
• We take the fight against inflation extremely seriously
• Our objective is to bring inflation back to 2% in the medium-term.
• Let there be no doubt in our determination to tame inflation and bring stability.
• We are moderating our restrictive stance. It is still restrictive. And we will stay restrictive until we bring inflation to the 2% target.
• We are far away from the neutral rate now
• Even if neutral rate has increased, we are far away now.

ECBs Lagarde’s press conference concludes at 9:38 AM ET.

In summary:

In October 2022, inflation peaked at double digits, but by September 2023, it had reduced to 5.2%, and currently, it stands at 2.6%. President Lagarde emphasized the need for more data to confirm the disinflationary path, noting that while restrictive measures were more pronounced in September, various factors such as base effects and wage trends could introduce uncertainties. Wages, particularly in the services sector, play a significant role in inflation. Although wages remain elevated, there are signs of a recent decline, and the ECB must consider wage divergences across countries and the impact on services prices.

The ECB’s policy decisions and data releases are not perfectly synchronized, making it difficult to predict future actions. Lagarde stated that market pricing of rate cuts is independent of ECB decisions, which have resulted in a reduction of anticipated rate cuts from 64 bps to 36 bps for the remainder of the year, totaling ~61 bps. Despite various challenges, including unanticipated bumps in the disinflationary process, the ECB is committed to bringing inflation back to the 2% target in the medium term. The decision to moderate the restrictive stance was almost unanimous, except for one governor. The ECB will continue to take a serious approach to combating inflation, staying restrictive until the 2% target is achieved. Lagarde affirmed that the ECB is far from reaching the neutral rate, which remains a key objective.

The EURUSD moved to a high of 1.0901 and in the process above the May 2024 high at 1.08944, but momentum could not be sustained.

This article was written by Justin Low at www.forexlive.com.