Christine Lagarde, President of the European Central Bank (ECB), has reiterated the bank’s commitment to a data-driven approach for monetary policy decisions while advocating for critical structural reforms. This follows the insights provided by Mario Draghi’s competitiveness report. Recently, the ECB announced a reduction in its deposit rate by 25 basis points, although both inflation and growth forecasts remained largely stable.
During a recent press conference, Lagarde emphasized a careful, data-dependent approach regarding interest rates, noting that decisions will be made on a “meeting by meeting” basis, grounded in economic data rather than a predetermined rate trajectory.
In its September meeting, the ECB trimmed its deposit facility rate to 3.5%, a decision anticipated by market experts. Lagarde articulated that it was “appropriate to take another step in moderating the degree of monetary policy restriction.”
Despite these adjustments, Lagarde made it clear that any future policy shifts are uncertain and will hinge on incoming economic indicators. “Our interest rate decisions will be guided by the inflation outlook, incoming data, and the transmission strength of our monetary policy,” she remarked.
September ECB Interest Rate Decision and Economic Forecast
Lagarde confirmed that the decision to cut the deposit facility rate by 25 basis points was reached unanimously among the ECB’s governing council. This adjustment was part of broader changes to the monetary policy framework, coming into effect on September 18.
Additionally, the main refinancing operations rate was lowered by 60 basis points to 3.65%, narrowing the spread between it and the deposit facility rate to 15 basis points. The marginal lending facility rate also declined by 60 basis points to 3.9%, maintaining a 25-basis-point spread over the refinancing rate.
As for the economic outlook, recent inflation figures have aligned with the ECB’s expectations, with new staff projections mirroring previous forecasts. The ECB anticipates that headline inflation will average 2.5% in 2024, 2.2% in 2025, and 1.9% in 2026, which aligns with earlier projections made in June.
Lagarde noted, “Inflation is expected to rise again in the latter part of this year, in part due to the previous sharp declines in energy prices dropping out of the annual rates. It should then decline toward our target over the latter half of next year.”
Regarding growth, the eurozone economy is projected to expand by 0.8% in 2024, increasing to 1.3% in 2025 and 1.5% in 2026. This represents a slight downward revision attributed to weaker domestic demand in upcoming quarters. “The risks to economic growth remain tilted to the downside,” Lagarde warned, highlighting that “credit growth continues to be sluggish amid weak demand.”
The ECB is scheduled to meet again on October 17, although Lagarde refrained from speculating on future interest rate movements.
Emphasis on Structural Reforms
A major focus of Lagarde’s address was the critical need for structural reforms across Europe to enhance growth and productivity. She lauded Mario Draghi’s competitiveness report and Enrico Letta’s recommendations for reinforcing the single market, both of which stress the urgency for reform and present practical proposals.
“It’s a formidable report,” Lagarde stated, calling it “a diagnosis that is severe, but accurate in our view.” She highlighted that it outlines essential structural reforms that would bolster Europe’s economic strength and aid the ECB in achieving better outcomes in monetary policy through increased productivity.
Moreover, she emphasized, “Structural reforms are ultimately the responsibility of the governments.” Lagarde also pointed out the importance of the Capital Markets Union, noting that its implementation would be advantageous for fostering broader financing opportunities for innovation.
She connected these reforms to the overarching goals of the ECB, remarking on their relevance to inflation, price stability, and the fundamental aspects of their monetary policies. Lagarde stressed that Draghi’s report encompasses a range of structural reforms that necessitate robust governmental leadership, particularly in strengthening Europe’s sovereignty in today’s complex geopolitical landscape.
Photo credit & article inspired by: Euronews
