Analysis-Lagarde goes through a difficult period “in charge” of the ECB’s message

By Francesco Canepa and Balazs Koranyi

FRANKFURT (Reuters) – European Central Bank President Christine Lagarde wore a necklace with the words “responsible” at Thursday’s news conference, but her caution underlined the difficulty of reaching consensus when the outlook is unrest and decision-makers are divided.

The ECB had just made its first interest rate cut since 2019 despite higher inflation expectations, in part to fulfill a commitment that many policymakers had made publicly after agreeing to it behind closed doors.

But the message included warnings about maintaining high domestic inflation and wages, and when Lagarde was asked whether more cuts would follow, she gave an answer that confused some market participants.

Her caution illustrates the challenge Lagarde faces as she tries to maintain unity among the ECB’s 26 policymakers – some of whom regretted committing to Thursday’s rate cuts weeks in advance – and communicate their point of view.

“The Governing Council members are scattered, they can’t agree on the details, so she probably didn’t have an alternative,” said Erik F. Nielsen, chief economic adviser to UniCredit.

The immediate result is that the ECB has doubled down on its “data dependence” mantra: the idea that it will not provide guidance on future policy decisions but will decide at each meeting based on the information received.

That’s easier said than done, since a dozen governors and board members of national central banks express their opinions and preferences almost daily, as Lagarde acknowledged Thursday.

“I am sure you will hear some of my excellent colleagues taking their view,” Lagarde said. “It (the rate cut cycle) will ‘take this long’, or it will ‘move this fast’. I caution against such a conclusion.”

Just hours after the meeting, some policymakers speaking on condition of anonymity said rates would most likely be held steady at the ECB’s next meeting in July, with the focus now shifting to September.

DEAL OR NO DEAL

ECB policymakers agreed to signal at their March 7 meeting that a rate cut was likely this month, as part of a deal negotiated by Lagarde and which brought together doves already calling for policy easing and hawks calling for caution.

After all, inflation had fallen sharply, falling close to the ECB’s 2% target, from more than 10% at the end of 2022, as the economy stabilized after a price squeeze that followed the invasion of Ukraine by Russia and the end of the COVID-19 pandemic.

But progress has now stalled and rising wages threaten to push inflation up again, making Thursday’s ECB rate cut harder to defend and calling future decisions into question.

The US Federal Reserve, facing similar inflation, has already delayed its rate cut plans and strong US job growth in May is expected to keep them on ice until September at the earliest.

Carsten Brzeski, global head of macro at Dutch bank ING, said the ECB may even have to reverse Thursday’s interest rate cut, just as it did with ill-timed hikes on the eve of the crisis financial crisis of 2008 and the sovereign debt crisis in 2011.

“There is a risk that the ECB will experience a ‘reverse Trichet moment’,” Brzeski said, referring to Jean-Claude Trichet, then president of the ECB.

Lagarde was evasive when asked whether the ECB would continue to scale back its strongest-ever streak of rate hikes, likely reflecting divergent views within the Governing Council.

“Are we entering a recall phase today? I wouldn’t do it voluntarily,” she said Thursday. “Is the recall process underway? There is a high probability.”

Marco Valli, global head of research at UniCredit, said the message was unclear and Arne Petimezas, an analyst at Dutch broker AFS, called it confusing.

“I am still not sure whether she meant to suggest that the likelihood of further cuts is low or high or that the ECB will remain on hold for a long period of time,” Petimezas wrote.

(Edited by Catherine Evans)