Frankfurt (Germany) (AFP) – European Central Bank chief Christine Lagarde warned Thursday the eurozone faces “risks all over” amid US tariff threats and massive German spending plans, as policymakers cut rates again but signalled future monetary easing was in doubt. “We have huge uncertainty,” Lagarde told a press conference after the ECB cut interest rates for the sixth time since June last year. “We have risks all over, and uncertainty all over.” The quarter-percentage-point reduction brought the Frankfurt-based institution’s benchmark deposit rate to 2.5 percent. The central bank for the 20 countries that use the euro has pivoted from hiking rates to tackle inflation, which surged with Russia’s invasion of Ukraine, to lowering them to boost the eurozone’s floundering economy.
While insisting that the process of bringing inflation back down to the ECB’s two-percent target remained on track, Lagarde listed multiple threats to the outlook, which made it hard to plot a path forward. “Tariffs — and particularly if there is retaliation — are not good at all, and are net-negative on pretty much all accounts,” she said, at a time when US President Donald Trump is threatening to hit the European Union with 25-percent duties. Worries about US trade policy had been pushing rate-setters towards hitting pause, according to analysts. Now, plans announced by Germany’s likely next leader to massively boost defence and infrastructure spending are adding to the factors complicating the ECB’s decisions.
While noting such increases could lift both growth and inflation — potentially prompting the ECB to slow rate cuts — Lagarde also stressed that the proposal by Friedrich Merz was a “work in progress”, with the extent of its impact still unclear. Merz’s dramatic move, announced Tuesday, was driven by fears that long-standing US security guarantees for Europe will be weakened under Trump amid a rush to end the war in Ukraine. The ECB on Thursday also released updated forecasts that highlighted the euro area’s economic woes. The central bank hiked its inflation forecast for 2025 to 2.3 percent from its previous estimate of 2.1 percent, made in December. The pace of consumer price rises in the eurozone had eased to 2.4 percent in February after having ticked up slightly over several months.
The ECB also trimmed its growth forecast for 2025 and 2026 to 0.9 percent and 1.2, respectively. The forecasts, however, were calculated before Merz’s announcement on spending. With the debate heating up on when to potentially pause cuts, the central bank tweaked its guidance to say rates were becoming “meaningfully less restrictive”, suggesting they were no longer having a major impact on bringing down inflation. Markets had been on the lookout for the change in language, which they believe could indicate that ECB officials are gearing up to hold rates or stop lowering them completely. That change, combined with the warnings on uncertainty, signalled that “policymakers are clearly becoming more cautious about further rate cuts”, said Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics.
Clemens Fuest, president of the Ifo economic research institute, went further: “Rising wages and the increase in new government borrowing could lead to inflation rising again instead of falling further — there is likely to be little scope for further interest rate cuts.” Even before the German announcement, ECB policymakers were already asking how much further it should continue on the path to lower interest rates. Isabel Schnabel, an influential ECB board member, told The Financial Times last month that policymakers were getting “closer to the point where we may have to pause or halt our rate cuts”. “We can no longer say with confidence that our monetary policy is still restrictive,” she said.
Lagarde, however, sought to stick to the ECB’s current stance of not foreshadowing future decisions, insisting officials will make decisions at each meeting based on the latest data. With uncertainty so high, Lagarde said the ECB was going to follow this stance “more than ever”. “As I said repeatedly — we are not pre-committing to any particular rate path,” she said.
© 2024 AFP
