ECB President Christine Lagarde, during her speech at IMF annual meetings, highlighted the weakening activity in the Eurozone’s economy in Q3 due to slower with risks lean more towards the downside ahead. Lagarde expects continued decline in inflation, but the path has risks on both sides. She also reiterated that current interest rate would bring inflation down to target is maintained for “sufficiently long duration”.

She noted, “Incoming data suggest that activity has been weak in the third quarter,” attributing this to “slower global demand and the impact of tighter financing conditions.”

Lagarde noted that the “risks to the outlook continue to be tilted to the downside,” while also acknowledging the possibility that factors like a “strong labour market, rising real incomes, and receding uncertainty” could uplift growth.

On the inflation front, Lagarde expects decline in Eurozone, driven by “easing cost pressures” and the influence of tighter monetary policy. But, “the downward path has risks in both directions.” While upward risks could emanate from factors such as “renewed upward energy and food cost pressures,” potential downside risks could arise from “weaker demand” or a deteriorating international economic environment.

Lagarde also reiterated ECB’s stance on interest rates: “we consider that our key interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our target.”

Full speech of ECB Lagarde here.

Minutes from ECB’s meeting held on 13-14 September 2023 revealed that “a solid majority of members” supported for the 25bps rate hike, event though the decision was described as a “close call”.

These members were particularly concerned about the persistently high levels of inflation. They stressed the importance of the rate increase as it would “signal a strong determination” to bring inflation back to the target in a timely manner.” The emphasis was on ensuring that the duration to realign inflation to the 2% target “should not extend beyond 2025.”

A significant concern raised was the potential misinterpretation of ECB’s commitment if there was a decision to pause. The minutes noted that “erring on the side of pausing the first time the decision was a close call could risk being interpreted as a weakening of the ECB’s determination,” especially given the backdrop of both headline and core inflation rates were above 5%.

Furthermore, it was highlighted that any such pause in the rate-setting process might be misconstrued, fueling market speculations that “the tightening cycle was over.” Such speculation, the members argued, “increased the risk of a rebound in inflation.”

Full ECB meeting acounts here.

ECB Governing Council member Yannis Stournaras emphasized caution against tightening monetary policy further today. He noted borrowing costs had already risen since the ECB’s last policy meeting as a result of higher bond yields. Furthermore, given that minimum reserves are not subject to remuneration, the total interest dispensed by the 20 Eurozone central banks to their respective commercial banks would see a decline.

He noted borrowing costs had already risen since the ECB’s last policy meeting as a result of higher bond yields. Furthermore, given that minimum reserves are not subject to remuneration, the total interest dispensed by the 20 Eurozone central banks to their respective commercial banks would see a decline.

Stournaras expressed skepticism regarding any immediate shift towards a tighter monetary stance. He articulated, “For the moment I see no reason why we should tighten monetary policy now because increasing the minimum requirements will imply monetary policy tightening.”

He also responded to suggestions from some counterparts on an early end to the ECB’s PEPP bond-buying initiative. Stournaras emphasized the importance of maintaining this tool, especially in the current context marked by significant geopolitical uncertainties.

He stated, “I see no value in bringing it (the end) forward especially now under the new uncertainty we have because of the events in Israel and Palestine.” Reiterating ECB’s need to retain its adaptability, he concluded, “So we need to keep our flexibility and act if necessary.”