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ECB’s Inflation Fight Nearing End But Not Over Yet, Lagarde Says

(Eurostat)

(Bloomberg) -- The European Central Bank’s fight against inflation is approaching its end but hasn’t been won yet, according to President Christine Lagarde.

“Out battle against inflation is nearing completion, not completed, not mission accomplished yet,” Lagarde told European lawmakers Wednesday in Brussels. “We still have a bit of work to do, but we are in sight of target and that would predicate that we begin looking forward more than we have in the last couple of years.”

The comments come on the eve of the week-long quiet period that precedes ECB rate decisions and feed into an intensifying debate on how quickly and how far to loosen monetary policy.

Faced with inflation that’s almost back at the 2% goal and an economy that’s struggling to grow, officials are widely expected to lower interest rates by a quarter-point for the fourth time since June next week — despite some investors still betting on a larger cut.

Beyond that, dovish officials back rapid loosening and won’t exclude bringing borrowing costs to levels that would stimulate growth, to avoid undershooting their price target. Hawks, though, warn against rushing or easing too much given lingering dangers.

Risks remain in the form of services inflation, which only inched lower to 3.9% in November as the headline number advanced to 2.3%. Then there’s the political turbulence in France and Germany that’s roiling bond markets, and the threat of US trade tariffs following Donald Trump’s victory in last month’s presidential election. 

Lagarde warned that the economy is likely to remain fragile in the near term, with uncertainty and downside risks clouding the outlook beyond that.

In prepared remarks, she pointed to immediate concerns that include slowing growth in the services sector and a continued contraction in manufacturing. Outside Europe, she cautioned over geopolitical strife and threats to international trade.

“Survey-based data suggest that growth will be weaker in the short term,” Lagarde said. “Further ahead, the euro area’s economic recovery should start to gather some steam. Consumer spending is expected to pick up as real incomes rise, and investment is expected to recover as the impact of past monetary-policy tightening fades.”

Speaking earlier Wednesday, ECB Governing Council member Olli Rehn told Finnish newspaper Helsingin Sanomat that officials will continue to lower rates in the coming months.

His Croatian counterpart, Boris Vujcic, concurred in an interview with Politico. “When the road is slippery, you take small steps and this is what we are doing,” he said.

Ireland’s Gabriel Makhlouf reiterated that a bigger rate cut on Dec. 12, as a small minority of investors continues to bet on, isn’t warranted.

“I would need to see some pretty significant evidence to push me into making a big leap more than 25 basis points,” he said in Dublin. “And I prefer to move cautiously and prudently.”

Lagarde said inflation is expected to temporarily increase this quarter as previous sharp falls in energy prices drop out of the annual rates, before moderating to target in next year. She stuck to her recent tone on monetary policy.

“We are on a disinflationary path,” she said. “We know that the direction of travel is downward and the pace at which we move down the hill is not pre-determined.”

At some point in the future, the ECB would also depart from its current approach of basing policy on recent data, Lagarde said. That would see it give more weight to “forward-looking elements” such as its quarterly economic projections.

--With assistance from Olivia Fletcher.

(Updates with ECB’s Makhlouf starting in 12th paragraph.)

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