Lagarde Predicts Bumpy Path to 2% Inflation Amid ECB Uncertainties

Christine Lagarde, President of the European Central Bank (ECB), anticipates a challenging journey towards achieving the 2% inflation target. She highlights numerous economic uncertainties that could affect the path to this goal. Lagarde's outlook reflects the complexities and potential obstacles the ECB faces in stabilizing inflation within the desired range. Her predictions underscore the need for careful monitoring and adaptive policies to navigate the uncertain economic landscape.

Boston Brand Media brings you the latest news - Christine Lagarde, President of the European Central Bank, emphasized the intricate path to achieving the 2% inflation goal during her speech at the ECB Forum on Central Banking in Sintra.

Christine Lagarde, the ECB President, underlined the challenging path to reaching the 2% inflation target at the ECB Forum on Central Banking in Sintra on Tuesday. Even with recent interest rate reductions and indicators of disinflation, Lagarde pointed out the significant uncertainties that continue to affect the euro area’s economic outlook.During a panel that included Federal Reserve Chair Jerome Powell, Lagarde elaborated on the ECB's choice to reduce rates by 25 basis points in June.

"We have made significant progress on the disinflationary trajectory," she remarked, indicating that the ECB's medium-term target is attainable, though with some variability. The latest forecasts suggest the 2% goal could be achieved by the final quarter of 2025, with a possible deviation of 0.1%."

However, Lagarde warned against expecting a straightforward progression of rate reductions in the future. She emphasized that upcoming decisions will remain data-driven: "It's not a fixed path... it's a step that will be followed by further data evaluation," she explained.

The ECB President recognized the robustness of the Eurozone's recovery, especially regarding unemployment, while also acknowledging the existing challenges.

Challenges in services inflation The recent inflation report for the Eurozone indicated a drop in the headline rate from 2.6% to 2.5% in June, although core inflation and services inflation stayed somewhat elevated.

"We still anticipate a bumpy road until the end of 2024," Lagarde stated. Lagarde explained the complexities of services inflation, partially attributing it to the delayed effects of wage negotiations. "In Europe, wage agreements are negotiated annually in some countries and triennially in others," she noted. This delay has led to a catch-up effect for wages, which had not been renegotiated for several years, thereby increasing service costs.

Additionally, Lagarde talked about the necessity of a balanced approach to inflation, taking into account the differing inflation rates in goods and services. "We don't need services inflation to be at 2% because manufacturing goods are below 2%," she explained, stressing the importance of understanding the underlying factors influencing these components.

Boston Brand Media also found that, when questioned about the possible effects of US monetary policy on the ECB's decisions, she emphasized that the ECB's main focus remains on its own economic conditions, though it also takes multiple factors into consideration.

Responding to a query about future rate cuts, Lagarde emphasized the ECB's careful approach. She mentioned the need to consider the spillover effects of monetary policies from other regions, especially the United States. "We take that into account, but we also base our monetary policy on what we observe in our economy," she stated.

Looking forward, Lagarde was asked about the possibility of returning to near-zero interest rates. While she considered it "very unlikely" in the current context, she hoped that such discussions would indicate a stable economic environment without any imminent shocks. Concerning the risks and spillovers of the French elections, Lagarde stated she would not comment on the political situation of any Member State, especially those currently facing elections. 

However, she highlighted that the ECB's mandate on price stability relies on financial stability, and policymakers are closely monitoring the rise in French bond yields.

Discussing the broader economic outlook, Lagarde emphasized the importance of fiscal governance within the European Union. She commended the new fiscal framework that replaced the Growth and Stability Pact, highlighting the need for member states to manage their debt and prioritize productivity and growth-oriented investments.

Lagarde also addressed the economic impact of generative AI, advocating for regulatory frameworks to manage its use and potential effects on growth, productivity, and inflation. She mentioned the ECB's careful adoption of AI for data analysis and modeling, ensuring data protection and human oversight.

Concluding her address, Lagarde identified cyber risks and geopolitical tensions, especially the ongoing war in Ukraine, as major threats to the European economy. When asked about the economic outlook for the next year, she optimistically predicted inflation in the low twos and expressed hope that unemployment would stay at record lows.

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Source: euronews‍