Christine Lagarde says ECB can keep rates on hold as long as needed

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The European Central Bank could keep interest rates on hold for more than one monetary policy meeting in a row, despite starting to lower borrowing costs for the first time in almost five years, its president Christine Lagarde has said.

Pouring cold water on the idea that a string of similar moves could soon follow last week’s quarter-percentage-point reduction in its deposit rate to 3.75 per cent, Lagarde said it “does not mean that interest rates will now move downwards in a linear fashion”. 

“We are not following a pre-determined path,” the ECB president said in a joint interview with four EU newspapers. “There could also be phases in which we leave interest rates unchanged.”

Asked if that meant it could leave rates unchanged for more than one meeting of the bank’s governing council, she replied: “It’s possible. We need to wait and see how labour costs develop. And we need to see that earnings continue to absorb the increases to date.”

Lagarde’s comments add to indications that the ECB is unlikely to be ready to cut rates again at its next meeting on July 18 because new quarterly data on Eurozone wages will not be available until after that date. 

The ECB raised eyebrows among some analysts by cutting rates before its peers in the US and UK at a time when the Eurozone economy is recovering, inflation has recently picked up and wages are still rising at close to a record pace.

The US Federal Reserve is expected to keep interest rates on hold in the face of sticky inflation when it meets this week and the Bank of England is considered likely to do the same at its meeting next week.

Since last week’s ECB meeting, several other members of the rate-setting council have said they think it should take a cautious and gradual approach to policy in the coming months, and investors have scaled back their bets on the scale and speed of ECB rate cuts this year.

Eurozone inflation ticked up from an almost two-year low of 2.4 per cent in April to 2.6 per cent in May, prompting the ECB to raise its own inflation forecasts for the next two years.

Lagarde admitted recent data “could have been better”, though she said the decision to cut rates was still “appropriate”, adding that the “disinflation process was sufficiently advanced”. 

She suggested the ECB would keep rates at a level where they continued to put a brake on the economy by restricting demand among businesses and consumers until inflation had fallen all the way to its target of 2 per cent — something the ECB does not expect until late next year.

“We have not yet ended the tightening monetary policy cycle,” she told Les Echos, Handelsblatt, Il Sole 24 Ore and Expansión. “We are still in tightening territory and we need to continue as long as it takes to get inflation back to 2 per cent.”

She described rising labour costs, higher company profits and declining worker productivity — all of which push up price pressures — as “our weak point” and said the ECB needed to see the data in these areas heading in the right direction.