Lagarde "Interest Rate Cut Not a Straight Line"
Nagel "Interest Rate at Mountain Ridge, Not Summit"
The European Central Bank (ECB) cut interest rates for the first time in five years earlier this month, but ECB officials drew a line on the market's expectations for consecutive rate cuts on the 10th (local time). They said that an immediate rate cut in July would be premature given that inflation has not been fully controlled.
On the same day, ECB President Christine Lagarde said in a joint interview with major European media outlets including Germany's Handelsblatt, "We have made the appropriate decision, but that does not mean that interest rates are on a straight downward path," adding, "There may be periods where rates are held steady again."
On the 6th, the ECB cut its key policy rates, including the benchmark rate, by 0.25 percentage points ahead of the U.S. Federal Reserve (Fed). This was the ECB's first rate cut since September 2019, about five years ago. However, instead of signaling further rate cuts, the ECB revised upward its forecasts for both inflation and economic growth in the Eurozone this year. Some interpret that many ECB officials had pledged rate cuts since early this year, and the recent cut was made to keep the promise to the market.
The market expects the ECB to cut rates once more within the year. Inflation in the Eurozone for May and first-quarter wage growth also came out higher than expected. Moreover, with the dominant view that the Fed will hold rates steady again, it is difficult to lower rates prematurely.
President Lagarde said, "We have not declared victory yet." She added, "We need more data, including on how wages and corporate profits are increasing and absorbing some labor costs, as well as productivity."
Although she did not comment on the possibility of rate changes next month, she said that whether to cut rates further depends on wage and corporate profit indicators that can be confirmed before the September meeting.
Joachim Nagel, President of Germany's Bundesbank, also made remarks cautioning against expectations of consecutive rate cuts on the same day. Speaking in Leipzig, Germany, Nagel said, "We are not at the mountain peak that must be descended," but rather "on a ridge where we need to find the exact point to go down further." He also stated, "Given the continued high uncertainty about the economy and inflation, we must remain cautious."
Peter Kazimir, Governor of the National Bank of Slovakia, also drew a line on expectations for a July rate cut, saying, "We are in no rush and have the luxury to enjoy the summer."
Governor Kazimir pointed to September as the possible timing for the next rate cut. He said, "September will be a very important month. It will be an appropriate moment to reassess our stance and decide whether adjustments to monetary policy settings are needed. In short, whether to cut rates." However, he added, "The economic situation in the Eurozone remains fragile, and the 'inflation monster' has not yet been defeated."
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