Lagarde does not open up on rate cut, insists on finding resources for transition

Milan – More than two hours before the European Parliament’s Committee on Economic and Monetary Affairs (ECON) in Brussels to talk about the first 25 years of the euro.

In a red leather jacket, Christine Lagarde, however, did not open up on the timing of the first rate cut after 10 consecutive hikes in the cost of money, while she reiterated the need for a true capital market union, at least to finance the energy transition. “According to the latest flash estimate, inflation fell to 2.8 per cent in January after rising by half a percentage point in December, a recovery that had been widely expected but turned out to be weaker than hoped,” the ECB president explained.

“Core inflation excluding energy and food is gradually declining, but its services component has shown signs of persistence,” she added. And then: “Wage growth continues to be strong and is expected to become an increasingly important driver of inflation dynamics in the coming quarters, reflecting the tightness in labour markets and workers’ demands to offset inflation.” This is signalled by the ECB’s forward-looking wage indicator, which “continues to signal strong wage pressures,” although agreements point to “some stabilization in the last quarter of 2023.” Therefore,” Lagarde stressed, “the latest data confirm the ongoing disinflation process and should gradually take us even lower over the course of 2024.

However, it does not seem to be the time for a rate cut: “These rates are at levels that, maintained for a sufficiently long period, will make a substantial contribution to ensuring that inflation returns to our medium-term target of 2 per cent in a timely manner. The current disinflationary process is expected to continue,” she reiterated, “but the Governing Council must be confident that it will bring us sustainably to our 2 per cent target. We will continue to follow a data-dependent approach to determine the appropriate level and duration of tightening,” the former IMF number one repeated, “taking into account the inflation outlook, the dynamics of underlying inflation, and the transmission strength of monetary policy.”

Concepts repeated often, including when answering questions from MEPs: “I will not say whether we will cut rates in late spring or early summer. But we are confident of moving toward 2 per cent in a timely manner, although we do not want to run the risk of a reversal that would necessitate new measures. We need more data to derive the guidance we need.”

Much of the back-and-forth with members of the Committee on Economic and Monetary Affairs, chaired by Irene Tinagli, focused on green policies initiated and discussed at the European Central Bank. “We have reduced the carbon footprint by 65 per cent in our corporate purchases. We are reducing the “brown” component in favour of the green one in collateral. However, we need solid data to operate,” signalled the Eurotower leader. Data that, among others, would highlight how there are “environmental risks that are uninsured and uninsurable.”

Some events cannot be covered. But in this case, the bank may not see a mortgage guaranteed, for example, which has an impact on the financial system that the ECB needs to monitor. “That’s why it’s important to take climate change into account,” Lagarde explains.

The main issue, however, remains that of resources so that all countries enhance “energy independence to improve competitiveness. Transition investments in our economy are massive: 700 billion a year. Moreover, the public sector cannot finance investments of this magnitude” because of massive debts. “This is why we need a step toward a capital markets union. Next Generation EU and RePower are just a first step,” the ECB president stressed. “Many financial entities or banks do not sufficiently estimate the impacts of climate change. The transition is not sufficiently financed. Now there is talk about green capital markets union; it is a track to be explored. It will be up to the next parliament to take this forward,” Madame Lagarde concluded.