The European Central Bank (ECB) will lower interest rates further if inflation continues to fall toward its 2% goal as restricting economic growth is no longer necessary, ECB President Christine Lagarde said on Monday.
The ECB has cut interest rates four times already this year and investors are betting on even more policy easing in 2025 as inflation worries have largely disappeared and anemic economic growth is now a bigger concern.
"If the incoming data continue to confirm our baseline, the direction of travel is clear, and we expect to lower interest rates further," Lagarde said in a speech in Vilnius.
She added that keeping rates at a "sufficiently restrictive" level was no longer warranted given weak growth and moderating price pressures, a hint suggesting that the next aim is the so-called neutral level, which neither restricts nor stimulates the economy.
While neutral is a vaguely defined concept, Lagarde in the past said that ECB research puts it between 1.75% and 2.5%, indicating that several more cuts in the 3% deposit rate may come before the neutral debate heats up.
Financial investors expect the ECB to cut rates at each of its next four meetings and see a greater than 50% chance of another move before the end of the year, which could then take the ECB's key rate to the bottom of this neutral range.
A key reason policy could ease so quickly is that the last remnants of high inflation are disappearing as pressure on service costs, the largest item in the consumer price basket is under control.
"Inflation momentum for services has also dropped steeply recently," Lagarde said. "These data suggest that there is scope for a downward adjustment in services inflation, and thereby domestic inflation, in the coming months."
Wage growth, another key concern in the past, also shows a more benign outlook. The ECB's wage tracker predicts 3% growth next year, a level that is finally consistent with the ECB's target.
There are even some downside risks to inflation, Lagarde argued, as geopolitical risks cloud the outlook and fresh shocks could hurt already weak growth.
"If the United States – our largest export market – takes a protectionist turn, growth in the euro area is likely to take a hit," Lagarde said.
