The European regulator is once again at an impasse, with inflation remaining a pressing issue.
According to ECB President Christine Lagarde, the regulator currently lacks sufficient evidence to declare that inflation threats have passed. Given this uncertainty, the European Central Bank is prepared to pause any rate cuts in July.
Given that the labor market in the euro area remains robust, the ECB has ample time to assess incoming data, Lagarde stressed in her speech in Sintra, Portugal, where she opened the ECB’s annual forum for central bank governors.
It is too early to declare victory over inflation, Lagarde said. "We are still facing several uncertainties regarding future inflation, especially in terms of how the nexus of profits, wages, and productivity will evolve and whether the economy will be hit by new supply-side shocks. It will take time for us to gather sufficient data to be certain that the risks of above-target inflation have passed," she added.
These statements suggest that the ECB will most likely keep borrowing costs unchanged. However, the head of the regulator left no comments on the current political and economic situation in France and the central bank’s next steps.
The state of the labor market is of particular importance to the eurozone economy. Experts describe it as strong. "The strong labor market means that we can take time to gather new information, but we also need to be mindful of the fact that the growth outlook remains uncertain. All of this underpins our determination to be data-dependent and to take our policy decisions meeting by meeting," Lagarde highlighted.
According to Lagarde, the officials’ assessment of inflation prospects is "informed by, but not limited to, our projections." She stressed the importance of incoming data and acknowledged that returning inflation to the 2% target would be challenging and may involve temporary setbacks.
Some ECB policymakers share Lagarde’s view. "Expectations for two more cuts this year are in line with my own thinking, if data evolve as expected," Lithuania’s Gediminas Simkus said. His opinion was echoed by Pierre Wunsch from Belgium, who said, "The first two rate cuts are relatively easy as long as inflation hovers around 2.5% because we will still clearly be restrictive."
Earlier, officials from the Bank for International Settlements warned that regulators should be cautious about cutting rates too quickly to avoid a renewed surge in inflation. Lagarde agreed, stating that the ECB’s "work is not done" and emphasizing the need for the regulator to "remain vigilant."
