After the euphoria for the first rate cuts after a long pause, the president of the ECB, Christine Lagarde, freezes the markets with a post on the blog of the European Central Bank. “By September 2023, inflation had fallen to 5.2%, around half the peak reached the year before. The danger of people having high inflation expectations had also mostly been overcome. This allowed us to inaugurate the next phase of our monetary policy: the ‘maintenance phase’, in which we kept rates constant. Today, however, we see progress on many fronts. Inflation has halved again, reaching 2.6%, and is currently well on track to reach 2% in the second part of next year”.
Lagarde, in the article in which she explains the reasons behind the rate cut decided on Thursday, explained that this step was expected but “not a given”. “The cost of money will decrease for citizens and it will be more convenient for businesses to borrow for investment purposes. Our decision also marks an important moment in the fight against inflation. By reducing rates – he continues – we have therefore decided to moderate the degree of restriction of monetary policy”. “But there is still a long way to go to eliminate inflation from the economy. And it won’t be an entirely easy road to travel. It takes a vigilant attitude, commitment and perseverance. Interest rates will therefore have to remain restrictive as long as necessary – warns Lagarde – to ensure price stability on a lasting basis”.
Lagarde freezes the markets and after the rate cut announces that for a while Europe “will have to keep its foot on the brake pedal”
“If you think of a car, it’s a bit like when the driver presses the brake pedal.” Initially, between 2022 and 2023, in the face of galloping inflation, “we raised rates at an unprecedented pace, by 4.5 percentage points in just over a year. We intervened forcefully because inflation had increased significantly too much.” Now, however, “for a while we will still have to keep our foot on the brake pedal even though we won’t push as hard as before.”
“Our future monetary policy decisions will depend on three things: whether we continue to see a timely return of inflation to target, whether we see an easing of overall price pressures in the economy, and whether we still find our monetary policy to be equally effective in containing inflation. These factors will determine when we can take our foot off the brake further.” “We have made important progress, but the fight against inflation is not over yet. As custodians of the euro – concludes the President of the ECB – we are committed to ensuring low and stable inflation for the benefit of all European citizens”.
