(Bloomberg) -- The direction of European Central Bank borrowing costs is clear but the pace at which they’ll be lowered is still to be decided, according to President Christine Lagarde, who didn’t rule out bigger moves.
Speaking Tuesday on the sidelines of the International Monetary Fund and World Bank annual meetings, Lagarde said disinflation is on the right track, describing recent numbers as “relatively reassuring.”
“I think for me, the direction of travel is clear,” she told Bloomberg Television in Washington. “What we have done starting in June is I think the sensible approach and one that should be continued with that caution element about it.”
“You will have people the whole week saying, oh, it should be 50, it should be 25,” Lagarde said. “No. Direction of travel clear, pace to be determined on the basis of backward- and forward-looking element using the three criteria and applying judgment.”
The ECB has stepped up the speed of its rate-cutting as inflation recedes more quickly than anticipated and concerns about the health of the euro zone’s 20-nation economy build. While officials aren’t offering many pointers on how rapidly or by how much borrowing costs will fall from here, investors are betting on quarter-point moves at the next four meetings and a deposit rate of 2% by mid-2025.
Fueling such wagers are indications that inflation could sustainably reach the 2% target sooner than thought. France’s Francois Villeroy de Galhau has suggested that the goal may actually be achieved as early as the start of next year.
Speaking separately, Governing Council member Robert Holzmann said a faster-than-expected retreat in prices will allow the ECB to lower rates again before too long. His Portuguese counterpart Mario Centeno said officials would be ready consider ramping up monetary easing should data suggest such a move.
Money markets added to loosening bets, with traders betting on 32 basis points of cuts in December and 58 basis points by January, compared with 30 basis points and 56 basis points before. That implies a 28% chance of a half-point move in December.
Inflation eased below 2% in September for the first time since 2021 due to tumbling energy costs. There are lingering worries, though, as wage growth and services prices remain elevated. A temporary uptick in inflation is expected in the coming months and Lagarde, despite her optimism, still had some words of caution.
“We are all confident that 2025 is the year when we reach our target on a sustainable basis,” she said. “But we have to be attentive to everything. We have energy prices that are low at the moment relative to where they could be. We have services going slightly down, but not much, we are still at 3.9% in the last reading and we have to pay attention to domestic inflation.”
The comments came in the wake of newly released projections by the IMF, which cut its forecasts for euro-zone growth both this year and next because of a weak industrial performance in Germany and Italy.
The economy is also struggling, led by what’s shaping up to be a second straight year of contraction for Germany. And policymakers must grapple with any economic fallout should Donald Trump retake the US presidency, as well as keep an eye on the Federal Reserve’s own loosening cycle.
In Europe, a long-anticipated jump in consumer spending is still on the cards, but is taking longer than hoped, Lagarde said.
“The timing of that is being extended and the European consumers certainly in general do not have the same propensity to consume than the US consumers,” Lagarde said.
--With assistance from Jana Randow, Charlie Zuza and James Hirai.
(Updates with more Lagarde, other ECB officials, markets starting in seventh paragraph.)
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