If you don't fly high, you can't land hard – Commerzbank

By and large, the ECB delivered what was expected yesterday. President Christine Lagarde did try to emphasize that the council's decisions remained data-dependent and were not predetermined. She expressed confidence that the neck of inflation would soon be broken and that the disinflation process was well under way. In addition, the data had weakened recently, but the ECB expects the economy to recover over time. She does not see a recession. The ECB will remain restrictive for as long as necessary to bring inflation back to the 2% target in a timely manner, Lagarde said, Commerzbank’s FX analyst Antje Praefcke notes.

More interest rate cuts in the foreseeable future

“Lagarde set the stage for the cutting cycle to continue in December and beyond. The risks to the economy remain tilted to the downside, according to the President. She cited numerous reasons, including the flare-up of tensions in international trade and geopolitical uncertainties. In view of the current election polls in the US and the conflict in the Middle East as well as the war in Ukraine, I think it is unlikely that these risks will diminish in the foreseeable future. When asked whether the current weakness of the German economy might not entail a risk of a recession in the euro zone, Lagarde was convinced that there would be no recession.”

“Despite the risks to growth, she was confident that a soft landing would follow. At this point, I would interject: ‘If you don't fly high, you can't land hard’. Even if there is no doubt that growth in the euro zone saw a decent boost after the pandemic, since 2023 it has not really picked up and is struggling, for a long time the hoped-for revival has been waited for. The winter half-year is likely to be difficult, and the recovery is not expected to be felt until 2025.”

“Although Christine Lagarde tried to paint a cautiously positive picture despite the risks to growth, she obviously did not convince the market. The bottom line for the market is rather the realization that the inflation problem will be solved in the foreseeable future, but that growth remains a problem, paving the way for further interest rate cuts. Accordingly, the euro came under downward pressure during the press conference. I fear that the euro will continue to have a hard time in the coming weeks if the hard data from the euro zone turns out weak, which is to be expected after the leading indicators have recently fallen.”