The president of the European Central Bank (ECB), Christine Lagarde, this Wednesday cooled the markets’ prospects for a first rate cut this spring, causing a decline in the stock markets.
The French banker pointed out in an interview with Bloomberg in Davos that we need to see the evolution of inflation and salaries in the coming months. Having seen that, “it is likely” that there will be consensus for a reduction in the summer. It would be a change of course after the unstoppable increases up to the current 4.50%.
Being later than what investors were discounting, who pointed to March or April, European markets have turned red. The Ibex 35 lost 1.4% in the mid-session, with somewhat smaller declines that were around 1% in Frankfurt or Paris. “These losses are being driven by uncertainty around expectations of rate cuts,” clarified Sergio Ávila, IG analyst.
Lagarde calls for caution because “there is still uncertainty” and suggests that more evidence of the fall in inflation is needed to finalize a decision. Some indicators “are not anchored at the level at which we would like to see them”, as is the case with inflation in services, the main sector of the European economy, where prices rise by 4%.
The president of the entity affirms that towards April or May, in the final stretch of spring, there will be more concrete data on the salary negotiations closed in the first quarter, since they have an impact on inflation. In this way, the June 6 meeting would be the first in which the ECB could evaluate this salary impact.
Companies increase salaries to keep pace with the rise in prices. “Employees lost purchasing power during 2021 and 2022 and now there is a recovery effect in the negotiations that are taking place,” Lagarde explained. These increases and the second round effects can disrupt the reduction in inflation, which is why we want to wait.
To combat the price spike, accentuated by the energy surge following Russia’s invasion of Ukraine, the ECB embarked on an unprecedented cycle of interest rate hikes, making ten increases in a row, before taking a break in October. . Lagarde insists that rates will remain at current levels “for as long as necessary” and get closer to her 2% target.
The parquets have discounted a scenario that does not seem like it will not arrive. “Central banks are rejecting these expectations and that’s causing a lot of volatility. It’s undoing what we saw last quarter when markets became overly optimistic about rate cuts,” says Justin Onuekwusi of investment firm St. James’s. Place.
Lagarde’s stance has been reinforced by the head of the Dutch central bank, Klaas Knot. “The markets are getting ahead of themselves,” he said in an interview with CNBC. “We are optimistic that we have a credible outlook for inflation to return to 2% in 2025, but many things still need to go right for that to happen.” Again, we have to wait a little longer. Especially since there are new problems emerging: the labor market is “incredibly” tense and the geopolitical risk also adds to the inflation risks, he has maintained.
