ECB will not start cutting rates in ‘next couple of quarters’, Christine Lagarde says

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The European Central Bank will not begin cutting rates for at least “the next couple of quarters”, its president Christine Lagarde has said.

Lagarde told the Financial Times Global Boardroom conference on Friday that eurozone inflation would come down to its 2 per cent target if interest rates were kept at their current levels for “long enough”.

But she added: “It is not something that [means] in the next couple of quarters we will be seeing a change. ‘Long enough’ has to be long enough.”

The ECB last month left its benchmark deposit rate unchanged, ending a series of 10 consecutive increases that has taken it from a record low of minus 0.5 per cent last year to an all-time high of 4 per cent in an attempt to tame inflation.

Markets are now pricing in a 75 per cent probability of a rate cut by the ECB by April, up from a 30 per cent chance in early October. 

Lagarde said eurozone inflation could still rebound from its recent two-year low, especially if there is another supply shock from the energy sector.

Inflation in the 20-country single currency bloc slowed to 2.9 per cent in October, down from its peak of 10.6 per cent a year earlier. But core inflation, which strips out volatile energy and food prices, remained at 4.2 per cent — more than double the ECB’s target.

“We should not assume this 2.9 per cent respectable headline rate can be taken for granted,” Lagarde said. “Even if energy prices were to remain where they are, there will be a resurgence of probably higher numbers going forward and we should be expecting that.”

Already halfway through her eight-year term after replacing Mario Draghi in 2019, Lagarde has had to deal with a series of shocks that have exposed the fragility of the eurozone economy, including the coronavirus pandemic and Russia’s full-scale invasion of Ukraine.

Criticised for being too slow to tackle the biggest surge in inflation for a generation, Lagarde has overseen the most aggressive increase in interest rates in the history of the ECB. 

Now she is trying to pull off a delicate balancing act: keeping borrowing costs at an elevated level for long enough to be sure that price pressures have been tamed, without causing a destabilising recession or a renewed debt crisis in the region. 

The eurozone economy ground to a halt this year, with gross domestic product shrinking 0.1 per cent in the three months to September after growing only 0.2 per cent in the previous three quarters. Some economists think it could contract again in the fourth quarter.

Lagarde said: “We are in this fascinating race against time where the calibration of our monetary policy has to be sustainable and subtle at the same time.”

Asked about the financial sustainability of some highly indebted eurozone members, such as Italy — where debt levels have risen above 140 per cent of GDP — she said: “Many countries have taken advantage of very low interest rates to extend the maturity of their debt.” Lagarde pointed out that the average debt service cost of eurozone countries was only 1.7 per cent.

“But it is a fact that there will be refinancings coming up as redemptions come along, and the cost of financing will be increasing,” she added.

Lagarde said she was “a little bit reassured” by early signs that the finance ministers of Germany and France had this week moved closer towards agreeing on new fiscal rules for EU countries, which she said was “critically important” to achieve.

The EU’s Stability and Growth Pact, which governs national spending and borrowing and is widely seen as unworkable, has been suspended since the pandemic hit in 2020 but is due to come back into force next year unless a reform is agreed before then.