ECB's Lagarde on Continuous Rate Cuts?

Caixin, October 17th (Editor Shi Zhengcheng) - Following the European Central Bank's (ECB) third interest rate cut of the year on Thursday, and the first consecutive rate cuts in thirteen years, the market's focus quickly shifted to the next question: What will be the pace of their next rate cuts?

Global media, armed with this question, pursued Lagarde with a comprehensive inquiry as she led all ECB board members to a meeting in Slovenia.

On macroeconomics: Economic growth risks are more inclined towards the downside

In her opening remarks at the press conference on Thursday, Lagarde further expanded policymakers' judgments on the economic trajectory and repeatedly mentioned the risks of a downward trend.

Lagarde stated that economic activity in Europe was "slightly weaker than expected," with investment and consumption remaining sluggish, as well as exports. However, the ECB expects that an increase in real income will help consumption, and a more accommodative policy will support investment.

Interestingly, Lagarde mentioned that the decision to cut interest rates today was "unanimously approved" by everyone. Just five weeks after the previous decision, hardly anyone supported further rate cuts in October.

She also referred to the economic stimulus report released earlier this month by her predecessor Draghi, who is known for his "whatever it takes to save the market" approach, calling on governments to follow up quickly and make strong commitments.

In terms of economic growth, Lagarde said that risks still tend to be on the downside. She stated that a decline in confidence could hinder investment and consumption, while geopolitical risks, a weak global economy, and trade tensions could all lead to a decrease in export demand.

However, the head of the ECB also emphasized that the current deflation has reached a critical point, but the goal has not been fully achieved.

She pointed out that service sector inflation fell to 3.9% in September, marking the second time in two years it has dropped below 4%, and most underlying inflation indicators either decreased or remained unchanged. However, the current expectation is that inflation will rise in the coming months, partly because the months when energy prices fell rapidly will no longer be included in the annual rate calculation as time goes on.The European Central Bank's (ECB) actions today were perceived by the market as a "dovish rate cut," coupled with the unexpected strength of US retail data, the euro/dollar continued to weaken.

Will there be another rate cut in December? Still not confirmed.

In the subsequent Q&A session, Lagarde was directly asked about whether "today's rate cut implies that there will be consecutive rate cuts in the following meetings."

Lagarde responded by saying that the reason we decided to cut rates today is that we believe inflation is on a good downward track. All the information we have received in the past five weeks points in one direction—rate cuts and downward economic growth. The ECB will continue to "rely on data," and the rate cut in October was a case of "changing policy direction based on data." So, there will be more data between now and the December meeting, and our method of deciding on policy has not changed.

She also revealed that during the September meeting, no one expected inflation to fall so quickly, which was a surprise to everyone. At the same time, we also expect that inflation will not continue to decline linearly over the next three months, so we should not make hasty conclusions at that time.

Lagarde emphasized: "(For the December rate cut), I have not opened the door to anything."

Lagarde stressed that for the European economy, any trade restrictions, uncertainties, or obstacles will have an impact. Tariffs, additional trade barriers, are obviously factors for economic downturns.

Regarding the questions of "why not directly cut rates by 50 basis points since the economy is not good" and "whether maintaining restrictive policies will lead to future inflation below the 2% target," Lagarde said that the advice given by Lane (Chief Economist of the ECB) this week was only to cut rates by 25 basis points, emphasizing that all governors unanimously agreed with this rate cut. At the same time, for inflation, there are also potential upward risks in addition to the downward risks, and the economic outlook will be updated in December, and no further comments will be made before that.

Lagarde also said that based on the data at hand, there is currently no prospect of the eurozone economy falling into a recession, which means a "soft landing" can be achieved. At the same time, she also emphasized that for policymakers, the current eurozone policy interest rates are undoubtedly in a restrictive state, and the timing of achieving the inflation policy target has been advanced, but it is obviously not now.