Lagarde sees more disinflation but seeks proof of return to 2%

Christine Lagarde, President of the European Central Bank.

European Central Bank President Christine Lagarde said the retreat in inflation in the eurozone will continue but that she and her colleagues need to see more evidence that price growth is returning to their goal.

Addressing European Union lawmakers in Strasbourg, Lagarde said wage pressures remain strong, reiterating that salaries will likely become an increasingly important driver of price dynamics in the coming quarters.

“The current disinflationary process is expected to continue,” Lagarde at a plenary debate on the ECB’s 2022 annual report. “But the Governing Council needs to be confident that it will lead us sustainably to our 2% target.” 

Her remarks come less than two weeks before the ECB next sets rates and only three days before the start of the week-long quiet period that precedes these meetings. Officials are increasingly converging around June as the most appropriate juncture to start lowering borrowing costs — even if some favour an earlier move.

Money markets are betting the ECB will start cutting rates a month before the Federal Reserve moves in July, as euro-zone price pressures ease faster than those in the US.

Inflation in the 20-nation region sank in 2023 and the ECB expects the trend to continue this year, albeit more moderately. It probably slowed to 2.5% in February, according to economists surveyed by Bloomberg. The data are due Friday from Eurostat.

Pay growth

Policymakers are particularly focused on labour costs as a key driver of medium-term inflation. While pressure on negotiated wages eased at the end of 2023, a new forward-looking indicator signals that elevated salaries aren’t yet at an inflection point.

Lagarde said last week that slower pay growth in the fourth quarter was “encouraging,” but that bargaining rounds in the following period will be vital for decision-making on rates.

Doves on the Governing Council worry more about an economy that only just avoided a recession in the second half of 2023, and fret about undershooting the price goal in the medium term.

In terms of Europe’s economy, “there are increasing signs of a bottoming-out and some forward-looking indicators point to a pick-up later this year", Lagarde said.

Separately, ECB Governing Council member Yannis Stournaras said he sees a first rate cut in June. He favours small steps of 25 basis points and that the ECB should start in June — but not later, saying that “realism and gradualism need to guide our actions.” 

Bloomberg