(Bloomberg) -- Christine Lagarde said the European Central Bank is becoming more optimistic that it will be able to get inflation under control, and will reflect on that at its October interest-rate decision.
The president’s comments to lawmakers in the European Parliament in Brussels on Monday amount to the strongest hint yet from her of possible momentum gathering among officials toward a cut.
“Inflation might temporarily increase in the fourth quarter of this year as previous sharp falls in energy prices drop out of the annual rates, but the latest developments strengthen our confidence that inflation will return to target in a timely manner,” Lagarde said. “We will take that into account in our next monetary policy meeting in October.”
German bonds pared declines as Lagarde said the economy is facing headwinds, with the 10-year yield trading flat on the day at 2.13% after reaching 2.18% earlier. Traders slightly added to bets on a quarter-point interest-rate cut from the ECB in October, with money markets implying a 85% chance of such a move.
The latest data on consumer prices, published earlier Monday, showed slowdowns in Italy and Germany, following numbers last week in Spain and France pointing in the same direction. That reinforces the idea that a historic spike in inflation has been contained.
“Disinflation has been accelerating over the last two months,” Lagarde said.
The remarks are her first since business surveys last week by S&P Global revealed a much weaker-than-expected performance for the euro zone’s 20-nation economy. That prompted markets to ramp up bets on a second straight cut in borrowing costs on Oct. 17.
“Looking ahead, the suppressed level of some survey indicators suggests that the recovery is facing headwinds,” Lagarde said. “We expect the recovery to strengthen over time, as rising real incomes should allow households to consume more.”
Following September’s decision to cut rates for a second time during this cycle, several Governing Council members indicated that they’d rather wait for more complete data on the economy before acting again. The question now is whether the deterioration in the growth outlook is enough to deviate from that path and bring forward monetary easing.
Remaining inflation concerns have focused on price pressures in the services sector, which have remained elevated because of strong wage growth. But Lagarde said there was progress on that front, too, amid signs that the labor market is softening.
“When I look at core inflation, I also see a downward trend,” she said. “We will continue to observe this directional trend. We have reasons to believe that the services is also beginning to abate, slowly and gradually, so we are heading in that direction of reduced inflation.”
--With assistance from Aline Oyamada and Bastian Benrath-Wright.
(Updates with more Lagarde comments starting in sixth paragraph.)
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