European Central Bank President Christine Lagarde said on Tuesday that the central bank would still cut interest rates in the short term regardless of any major shocks.
Lagarde said the European Central Bank would monitor oil prices “very closely” amid growing concerns about conflict in the Middle East. However, she said the oil price response has been “relatively mild” since Iran launched unprecedented air strikes on Israel over the weekend.
Her comments came shortly after the central bank gave its clearest indication yet that it could begin cutting interest rates during its June meeting.
“We are observing a deflationary process and it is proceeding as we expected,” Lagarde told CNBC’s Sarah Eisen on the sidelines of the International Monetary Fund’s spring meetings.
“We just need to have a little more confidence in this deflationary process, but if it develops as we expect, if we don’t have a major shock to our development, we will be heading towards a point where restrictive monetary policy will have to be eased,” Lagarde said.
“As I said, without additional shocks, now is the time to loosen restrictive monetary policy over a fairly short period of time,” she added.
The European Central Bank held interest rates steady at record highs at its fifth consecutive meeting on Thursday but signaled that cooling inflation meant rate cuts could begin soon.
The European Central Bank changed its previous language and said that a 4% deposit rate cut would be “appropriate” if underlying price pressures and the impact of previous interest rate hikes can increase confidence that inflation will fall back to the 2% target. Way.
The central bank had not directly mentioned easing monetary policy in previous communiqués.
Asked whether further rate cuts were likely to follow the June rate cut, Lagarde replied: “I’ve been very clear on that, and I’ve said it deliberately, we’re not pre-committing to any interest rate path.”
“There’s huge uncertainty there… We have to watch these developments, we have to look at the data, we have to draw conclusions from the data.”
Lagarde declined to comment when asked whether the ECB’s third interest rate cut this year was a reasonable expectation among market participants.
Policymakers and economists have focused on June as the month when interest rates could begin, after the European Central Bank cut its medium-term inflation forecast. Since then, price growth in the euro zone has cooled more than expected in March.
Asked about the continuing decline in central bank confidence in inflation as commodity prices rise, especially as oil prices soar amid geopolitical tensions, Lagarde replied: “All commodity prices will have an impact and we have to Pay close attention to these trends.
“Obviously, this has a direct and rapid impact on energy and food,” she added.
“The biggest risk comes from geopolitics”
Earlier on Tuesday, ECB policymaker Olli Rehn explain The prospect of a rate cut in June depends on whether inflation falls as expected, noting that the biggest risks to the ECB’s monetary policy come from tensions between Iran and Israel and the ongoing war between Russia and Ukraine.
“As summer approaches, we can start to reduce the restrictive level of monetary policy, provided that inflation continues to fall as expected,” Bank of Finland Governor Rehn said in a statement.
He added: “The biggest risks come from geopolitics, including the deterioration of the situation in Ukraine and the possible escalation of the conflict in the Middle East with all its consequences.”
The Israeli military has pledged to respond to Iran’s massive air strikes on Israel on Saturday. World leaders have called for “maximum restraint” following weekend attacks amid fears of escalating conflict in the Middle East.
While investors have sharply pared their bets on a rate cut by the Federal Reserve, speculation persists that the European Central Bank may soon begin cutting interest rates. Traders now see a 20% chance of a rate cut by the Fed in June, after another inflation data showed consumer prices remain sticky.
—CNBC’s Jenni Reid contributed to this report.
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