Lagarde looks optimistic about ‘disinflation process’

The European Central Bank President, Christine Lagarde, has warned that rapid wage growth is slowing in the eurozone, with interest rates holding at 4%. According to Lagarde, disinflation process is at work, and the pick-up in inflation in December was weaker than expected.

Lagarde also noted that price pressures would ease further over the course of the year. However, she warned that rapid wage growth and lower productivity were keeping price pressures high. The Euro fell after Lagarde spoke, slipping 0.3 per cent against the dollar to $1.0845.

She outlined both upside and downside risks to inflation, but said it could fall faster than forecast in the short term if energy prices continued to drop in line with lower market expectations for oil and gas prices. The ECB is closely monitoring the disruption caused by the Middle East conflict, as shipping costs are increasing and delivery delays are increasing, adding an additional risk for the economy.

Investors are watching for clues from central bankers on how fast inflation is likely to fall and when borrowing costs could start to be lowered. Western central banks are becoming more confident they could soon start cutting interest rates as inflation falls closer to their targets, but they are weighing the risk of a resurgence in price pressures if they lower borrowing costs too soon against the danger of doing unnecessary damage to growth and jobs by waiting longer than needed.

Central banks in Japan, Canada, and Norway have left policy unchanged this week, with similar outcomes expected from the US Federal Reserve and the Bank of England next week. The ECB predicted that inflation would slowly drop to its 2% target by mid-2025, and Lagarde said a rate cut “is likely” by the summer.