In her address to European Parliament’s Committee on Economic and Monetary Affairs, ECB President Christine Lagarde noted that the fall in October’s inflation to 2.9% was due to both “general decline” and “base effects,” with non-energy and non-food inflation continuing to moderate. However, domestic inflation, less affected by imports, remains stubbornly high, indicating inflation is now “driven more by domestic sources than by external sources”.

Lagarde highlighted that strong wage pressures are mainly a “catch-up” effect from past inflation, rather than a new, s”self-fulfilling dynamic”. She anticipates continuation of the weakening in inflationary pressures, though a slight increase in headline inflation might occur in the near term due to base effects. Yet, she expressed that medium-term inflation outlook is clouded with “considerable uncertainty.”

Regarding the broader economy, Lagarde pointed out that Eurozone activity has “stagnated” recently and is expected to “remain weak for the rest of the year,” as reflected in Q3 GDP contraction. This weakness stems from higher interest rates, reduced foreign demand, and diminishing effects from economic reopening. While manufacturing output has been declining, services sector is also weakening, and there are signs that job growth may slow down by year-end.

Despite subdued short-term outlook, Lagarde believes Eurozone economy will “strengthen again over the coming years,” driven by decreasing inflation, improved household incomes, and stronger demand for Euro area exports.

Finally, she reiterated the ECB’s commitment to maintaining policy rates at “sufficiently restrictive levels for as long as necessary,” basing future decisions on data, inflation dynamics, and the effectiveness of monetary policy transmission.

Full remarks of ECB Lagarde here.

ECB President Christine Lagarde, said at Bundesbank event today that the central bank has “already done a lot” in fighting inflation, referring to the series of rate hikes. Now, given the “amount of ammunition” being deployed, ECB is positioned to “observe very attentively”.

With observations on how tightening have impacted people’s economic life, ECB can decide, “how long we have to stay there and what decision we have to make — up or down, she added.

However, despite these efforts, Lagarde emphasized that “the battle is not over and we’re certainly not declaring victory.”

ECB’s October meeting accounts reveal a consensus among “all members” to maintain the three key ECB interest rates unchanged. This decision reflects a shared confidence that current monetary stance was “sufficiently restrictive” for allowing the governing council to assess the “inflation outlook”, “dynamics of underlying inflation”, and “strength of monetary policy transmission”.

The minutes also noted a shift in market expectations, indicating that policy rates are anticipated to remain high for a longer period than previously predicted. Market expectations are transitioning from a “hump-shaped” interest rate path, typically recommended by macroeconomic models, to a “flatter” profile with a delayed first cut in the deposit facility rate.

A key point of discussion was the importance of avoiding an unwarranted loosening of financial conditions. In line with this, some members argued for “keeping the door open for a possible further rate hike”, emphasizing the commitment to data-dependence in its decision-making process.

In conclusion, ECB emphasized the need to remain “both persistent and vigilant.”

Full ECB meeting accounts here.

Bundesbank President Joachim Nagel, in his remarks at a conference overnight, suggested an element of uncertainty regarding further ECB rate hikes, adding that will be “data driven.”

However, he expressed a belief that ECB is “close to that level we see as the terminal rate,” and added, “rates will stay where they are for a while.”

On a positive note, Nagel observed that inflation is on the decline, describing it as “a greedy beast” that ECB is actively working to tame. He expressed confidence in ECB’s strategy, projecting that it is on track to bring inflation closer to its 2% target over the next 12-15 months.

Despite this optimistic view on inflation, Nagel cautioned that there are still risk factors that could spur another round of inflation. He acknowledged the uncertainty in predicting future economic developments, concluding with “So nobody knows” what’s next.