Christine Lagarde, President of the European Central Bank (ECB), stated that the bank is likely to further reduce borrowing costs as it moves closer to its 2% inflation target. This comes as past inflation spikes begin to ease, allowing ECB officials to concentrate on managing future uncertainties.
In a recent statement, Lagarde indicated that while inflation has slowed considerably from previous highs, it still remains above the 2% target, creating room for reducing borrowing costs, with data suggesting a possible downward adjustment in services inflation in the forthcoming months, contributing to a decrease in domestic inflation.
Despite four previous cuts, the ECB believes that the current rates continue to restrict economic activity. A majority of officials advocate for a policy shift towards a neutral position that neither hinders nor boosts growth. According to financial market predictions, this equilibrium could be attained as early as the middle of the following year.
There is widespread consensus among officials that the Eurozone economy is going through a difficult phase, with high levels of uncertainty causing reluctance among consumers and businesses to spend.
While the ECB’s latest growth estimates for the next year indicate an acceleration up to 1.1%, this could be hampered by various global conflicts, Donald Trump’s potential re-election, and local political strife.
Lagarde noted that the lackluster domestic recovery and a noticeable stagnation in private spending have been critical factors in the current decelerated economic activity. Although she expected the prevailing gloominess around actual household incomes to fade as inflation issues recede, she cautions that mounting geopolitical instability could further dent consumer confidence.
As a result, analysts anticipated a series of reductions in borrowing costs until the deposit rate hits the 2% mark. Concurrently, investors are factoring in the potential for a significant cut during these reductions, a possibility that ECB officials have not dismissed.
