Lagarde Keeps Up ECB Rate Suspense, Favoring Action Over Words


(Bloomberg) — Christine Lagarde avoided giving an indication of whether the European Central Bank will raise or hold interest rates next week as she delivered a speech in London. 

The president of the Frankfurt-based institution kept up suspense around one of the most uncertain decisions in its yearlong battle against inflation, focusing instead on challenges in communicating at an uncertain time.

“Actions speak louder than words,” Lagarde said Monday at a seminar in London organized by the European Economics & Financial Centre. “We have increased our policy rates by a cumulative total of 425 basis points in the space of 12 months — a record pace in record time. And we will achieve a timely return of inflation to our 2% medium-term target.”

ECB officials meeting Sept. 14 must assess if a recent slowdown of the economy is sufficient to warrant a first pause in the relentless tightening cycle that began more than a year ago. At the previous meeting in July, Lagarde said policymakers could hike or hold as they increasingly focuses on data to guide their actions.

New euro-zone inflation numbers released last week showed a closely-watched underlying measure slowed to 5.3% in August from 5.5% in the previous month. Officials are also seeing indications that the contraction in private-sector activity has intensified. 

Money markets are placing around one-in-four odds on the ECB raising rates a quarter-point to 4% next week. That compares to as much as a 60% chance before economic data showed core inflation in the euro area slowed.

Lagarde and her colleagues are still waiting to weigh the ECB’s in-house economic forecasts, which are a key piece to the puzzle of rate decisions. 

Some more hawkish policymakers have continued to push for another rate increase, though others acknowledge a more clouded picture. 

Isabel Schnabel, the Executive Board member in charge of markets, said last week that while inflation is still high, growth prospects are worse than officials predicted in June.

With a pre-decision blackout period kicking in on Thursday, scrutiny on comments is intensifying. 

Speaking earlier Monday, Portugal’s Governing Council member Mario Centeno said there is a risk of raising interest rates too far as the economy adjusts to new financial conditions.

Other officials including Executive Board members Fabio Panetta and Frank Elderson refrained from addressing the matter of the upcoming decision. 

Similarly, Bundesbank President Joachim Nagel, normally one of the ECB’s hawks, discussed bank reserves in his comments delivered in Frankfurt on Monday. 

He signaled he would be in favor of raising minimum reserve requirements after a decision in July by the ECB to stop paying interest on them. 

“We should be open to do more,” he said. “The financial system shouldn’t take for granted that this is the end of what we have to do in the Governing Council, how to really tackle this excess liquidity story.” 

–With assistance from James Hirai.

(Updates with Nagel in final three paragraphs)

©2023 Bloomberg L.P.

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