Lagarde: Inflation currently faces "two-way risks" and the European Central Bank will further cut interest rates
European Central Bank President Christine Lagarde stated that the inflation outlook faces "two-way risks" and will further lower interest rates. She pointed out that despite having cut rates four times, the current rate still restricts economic activity, and a shift towards a neutral policy may occur in the future. The Eurozone's economic growth is sluggish, with weak household and business spending, and it is expected that the economic growth rate will accelerate to 1.1% next year. Analysts believe that borrowing costs will continue to decline, with investors betting on a greater possibility of rate cuts
According to Zhitong Finance, European Central Bank President Christine Lagarde stated that the ECB will further lower interest rates, and the risks to the current inflation outlook are "two-sided." Just days after the ECB reduced borrowing costs to 3%, Lagarde told reporters that the clear direction moving forward is "downward," and that recent actions "are not our last rate cut."
Lagarde stated on Monday: "What we are seeing now is a change in the risk situation. So far, our inflation forecasts are associated with upside risks, and therefore we believe that inflation could actually be higher than our predictions. We now consider the risks to be two-sided, which is different from being balanced."
Even after four rate cuts, the ECB believes that interest rates are still limiting economic activity at current levels. Most officials indicated that policy could gradually shift to a neutral environment that neither restricts nor stimulates growth. According to bets in the money markets, this could be realized as early as mid-next year.
The backdrop to this debate is that the Eurozone economy is struggling to build growth momentum, with households and businesses reluctant to spend amid rising uncertainty. The ECB's latest forecasts show that economic growth is expected to accelerate to 1.1% next year, while conflicts around the world, the Trump 2.0 risk, and political turmoil in the U.S. suggest that the economy is likely to weaken.
The challenge is that this threshold is determined by various potential forces, which are difficult to observe in real-time. Lagarde previously mentioned an interest rate range between 1.75% and 2.5%, but ECB Executive Board member Isabel Schnabel indicated it could be as high as 3%.
However, analysts expect that borrowing costs will continue to decline before deposit rates fall to 2%. Investors are betting on the possibility of larger rate cuts in the pricing process, and officials do not rule out this possibility