FRANKFURT (Reuters) – The European Central Bank is increasingly confident that inflation will fall back to its 2% target and this should be reflected in its October policy decision, ECB President Christine Lagarde said on Monday.
The ECB cut interest rates from record highs in June, and cut again earlier this month, but Lagarde gave few hints at the time about the bank’s next move, leaving markets guessing.
Her comments on Monday will bolster already abundant bets on a further cut in October given a rapid deterioration of the growth outlook and falling energy costs.
“The latest developments strengthen our confidence that inflation will return to target in a timely manner,” Lagarde told a parliamentary hearing in Brussels. “We will take that into account in our next monetary policy meeting in October.”
Inflation in the 20-nation currency bloc likely fell below the ECB’s 2% target for the first time since mid-2021 this month, a raft of national data suggests.
This, along with poor growth indicators, has raised bets on a 25 basis point rate cut in October and markets now see a 75% chance of a move, up from 25% seen early last week.
Lagarde also acknowledged the recent run of poor growth readings.
“Looking ahead, the suppressed level of some survey indicators suggests that the recovery is facing headwinds,” she told a regular hearing of the Committee on Economic and Monetary Affairs.
Still, she repeated the bank’s usual line that the recovery is expected to strengthen and rising real incomes should allow households to consume more.
She added that the labour market, the source of some price pressures via rapid wage growth, remains resilient, even if wage growth is moderating and corporate profits are absorbing some pay increases.
(Reporting by Balazs Koranyi; Editing by Francesco Canepa and Christina Fincher)
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