The European Central Bank (ECB) projects that inflation will continue to ease through 2024, but it needs more data to be confident it will hit the 2% target before deciding on any potential rate cuts, according to President Christine Lagarde in a briefing to the European Parliament on Thursday.
“The last thing anyone wants is a rushed decision that lets inflation rebound and forces us to take further steps”, she told members of the Economic and Monetary Affairs Committee, who questioned the timing of a possible policy easing.
Although inflation has declined in recent months, the ECB has held its key policy rate at 4.5% since September, its highest level in two decades following rate hikes starting in July 2022 to curb price pressures.
The ECB president reiterated that a disinflation trend is underway and the institution expects it to continue through 2024, but she declined to forecast when a rate cut might be appropriate as calls for easier policy grow louder amid the recent inflation slowdown.
“We are confident that we are moving, directionally, toward 2% in the medium term, but we still need more certainty. There is not enough clarity yet to ensure this is sustainable”, Lagarde explained.
“We do not want the risk of a reversal, which would waste all we have achieved and would require further measures”, she added.
In this regard, she stressed that the Governing Council will decide at each meeting, based on data from multiple sources to determine the appropriate level and duration of tightening, taking into account inflation outlooks, underlying inflation, and the strength of the transmission of monetary policy.
“We are not going to sleep. We are determined to reach our objective”, Lagarde told the Parliamentarians in her final briefing before the European elections in June.
In January, the annual inflation rate in the euro area fell to 2.8% after a half-point rebound in December, while core inflation — which excludes energy and food — eased to 3.3%, with both figures down by a tenth from the previous month.
Wages push prices higher
Regarding the factors likely to influence inflation in the coming months, Lagarde highlighted that wage growth is expected to become a more important driver in the coming quarters.
She noted that the ECB’s wage monitor continues to signal strong wage pressures, though collective agreements point to stabilization in late 2023, and she emphasized that the impact of pay increases in 2024 will largely depend on upcoming wage negotiations.
These wage gains, however, are partly offset by profit margins on the part of firms.
Lagarde also pointed out that service-sector inflation shows signs of persistence.
On the macroeconomy, she viewed overall activity as weak across many sectors, with data suggesting a continuation of that trend in the near term, even though some indicators hint at a rebound later in the year.
In 2023, euro-area GDP grew by 0.5%, far below the 3.4% rise in 2022, while the European Commission’s forecasts released today project a 0.8% increase this year.
Balance sheet reductions
Lagarde also indicated that the review of the operating framework for providing liquidity to banks will likely include a mix of a bond portfolio and bank lending operations with different maturities, with completion expected in a couple of months.
She added that in the coming years the ECB’s balance sheet will be smaller than it has been, following the end of debt purchases.