In a widely anticipated move, the European Central Bank (ECB) has once again wielded its most potent weapon – interest rates – in an aggressive bid to tame the beast of inflation stalking the eurozone. The central bank slashed rates by a quarter point to 3.25% on Thursday, marking its third cut of 2024 and the first back-to-back reduction in 13 years. The audacious maneuver comes as ECB President Christine Lagarde boldly declared they are in the process of “breaking the neck of inflation.”
Lagarde: “Breaking the Neck of Inflation”
Speaking at a press conference in Ljubljana, where policymakers held their October meeting, Lagarde asserted that while they haven’t completely vanquished inflation yet, they are well on their way to doing so. “Have we broken the neck of inflation? Not yet,” she acknowledged. “Are we in the process of breaking that neck? Yes.”
The ECB chief pointed to the precipitous drop in eurozone inflation, which plummeted to 1.7% in September – the lowest level since April 2021 – as evidence their relentless rate hikes are bearing fruit. “The disinflationary process is well on track,” Lagarde declared, allowing the bank to ease its foot off the brakes slightly by opting for a smaller rate cut.
Inflation Tamed, But Economic Woes Mount
Yet even as inflation recedes, dark clouds are gathering on the economic horizon. Lagarde conceded that incoming data suggests eurozone business activity “has been somewhat weaker than expected,” with manufacturing contracting and the once-robust services sector losing steam. Germany, the region’s biggest economy, appears to be tipping into recession, while growth across the eurozone is sputtering.
Policymakers are betting that the boost from lower rates can keep the expansion alive without reigniting inflation. “The key challenge in monetary policy is getting the timing right,” argued German ECB policymaker Joachim Nagel, warning that acting too late risks letting inflation become entrenched.
“The sluggish European economy needs a liquidity boost, but monetary policy is not the silver bullet. We will only get back on a path of growth if EU governments do something about productivity growth and reforms.”
– Markus Ferber, German Conservative MEP
A Soft Landing or Turbulent Times Ahead?
The ECB remains doggedly optimistic they can engineer a proverbial “soft landing” – reining in inflation without capsizing the economy. “On the basis of the information that we have, we certainly do not see a recession,” Lagarde reassured. “The euro area is not heading for recession. And we are still looking at that soft landing.”
But many analysts fear the central bank is underestimating the headwinds facing the eurozone and that by focusing so single-mindedly on inflation, it risks exacerbating the economic slowdown. “The ECB is still looking in the rear-view mirror,” lamented Marco Valli, chief European economist at Unicredit. “It’s fighting the last war against inflation while the economy deteriorates.”
The Path Forward: Data-Driven Decisions
As for the future path of rates, Lagarde emphasized policymakers are not locked into any predetermined course, but will rely on a “data-dependent, meeting-by-meeting approach.” Analysts broadly expect the ECB will squeeze in one more quarter-point cut before year-end, with a further reduction to 2% seen by mid-2024.
“The limited data flow ahead of the decision meant the ECB placed more weight on a raft of survey evidence which signalled a deteriorating economic backdrop. Domestic activity shows no sign of improvement as households remain cautious despite robust growth in household incomes.”
– Yael Selfin, Chief Economist at KPMG
The road ahead for the ECB is fraught with peril as it seeks to thread the needle between taming inflation and sustaining growth. As storm clouds gather over the global economy, the stakes could scarcely be higher. Whether Lagarde and her colleagues can break the back of inflation without breaking the economy may well determine the fate of the eurozone for years to come.
