Get your free copy of Editor's Digest
FT editor Roula Khalaf picks her favourite stories in this weekly newsletter.
European Central Bank (ECB) President Christine Lagarde said the bank could keep interest rates on hold for multiple consecutive monetary policy meetings, despite having begun to lower borrowing costs for the first time in nearly five years.
Following last week's cut in deposit rates by 0.25 percentage point to 3.75 percent, Lagarde poured cold water on the idea that a similar series of moves could come soon, saying “this does not mean that interest rates will fall in a linear fashion going forward.”
“We are not on a pre-determined path,” the ECB president said in a joint interview with four EU newspapers. “There may be a stage where we keep interest rates on hold.”
Asked whether this meant interest rates could remain unchanged across multiple board meetings, the governor said: “That is possible. We need to wait to see how staff costs develop and also to ensure that profits continue to absorb the increases we have seen so far.”
Lagarde's comments suggest the ECB may not be ready to cut rates again at its next meeting on July 18, as new quarterly data on euro zone wages will not be available until after that date.
With the euro zone economy recovering, inflation having accelerated recently and wages still rising near record highs, the ECB surprised some analysts by cutting rates ahead of other central banks in the United States and Britain.
The US Federal Reserve is expected to keep interest rates on hold when it meets this week due to persistently high inflation, and the Bank of England is likely to do the same when it meets next week.
Since last week's ECB meeting, several other rate-setting Governing Council members have signaled they want a cautious and gradual approach to policy in the coming months, leading investors to scale back their bets on the size and speed of the ECB's rate cuts this year.
Eurozone inflation rose to 2.6% in May from a nearly two-year low of 2.4% in April, and the ECB raised its inflation forecast for the next two years.
While Lagarde acknowledged that recent data “could have been better,” she added that the decision to cut rates remained “appropriate” and that “the process of containing inflation is well advanced.”
She suggested the ECB would keep interest rates at a level that would continue to put a brake on the economy by restricting business and consumer demand until inflation had fully fallen to its 2% target, which the ECB does not expect to happen before the end of next year.
“The cycle of monetary tightening is not over yet,” she told Les Echos, Handelsblatt, Il Sole 24 Ole and Expansion newspapers. “We are still in the territory of monetary tightening and it needs to continue as long as necessary to get inflation back to 2 percent.”
He described rising labour costs, rising corporate profits and falling worker productivity, all of which are pushing up price pressures, as “our weaknesses” and said the ECB needed to see that data in these areas was heading in the right direction.
