ECB President Lagarde says the “darkest days” of high inflation in the euro zone are over

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European Central Bank President Christine Lagarde is closer than ever to claiming victory in the fight against inflation, saying “the darkest days of winter look like they are behind us” and that further interest rate cuts are likely.

“The way forward is clear and we expect further reductions in interest rates,” Lagarde said in Vilnius on Monday.

Lagarde’s comments are likely to heighten financial market expectations for further interest rate cuts from the European Central Bank. Investors are already pricing in a series of consecutive moves in benchmark deposit rates in the first half of 2025 amid signs of weakening economic growth and easing price pressures.

The European Central Bank last week cut borrowing costs by a quarter of a percentage point to 3% for the fourth time this year and tone down its hawkish language.

Lagarde said on Monday that the risk that long-standing high underlying inflation could undermine a return to price stability has receded “recently”.

The European Central Bank began raising interest rates in 2022 as prices soared due to a post-pandemic surge in demand, bottlenecks in global supply chains and rising energy costs following Russia’s invasion of Ukraine.

At the end of 2022, the inflation rate hit a record high of 10.6%, more than five times the European Central Bank’s 2% target.

Annual inflation has fallen rapidly this year, falling to 2.3% in November. According to the latest forecasts released by the European Central Bank last week, growth is expected to reach 2.1% next year and 1.9% in 2026.

“There is now greater consistency between our forecasts and underlying inflation,” Lagarde said on Monday, adding that the ECB was now “close to achieving our targets” [2 per cent] Target”.

She said the ECB’s main concern remains that wage growth will fall from 4.8% this year to 3% in 2025: “We broadly believe this level is consistent with our target.”

Lagarde pointed to a weaker-than-expected economic recovery in the euro zone as a “downside risk” to inflation, noting that “successive modest downward revisions to the growth outlook” since 2023 “equate to quite significant downward revisions over time.”

While last summer the central bank forecast GDP growth of 1.8% annually in 2024, it now only expects growth of 0.7% this year.

The president of the European Central Bank said geopolitical uncertainty could change “the risk appetite of investors, borrowers and financial intermediaries”. The ECB’s main concern is that a sharp and uncontrolled widening of bond spreads among euro zone member states could reduce the effectiveness of monetary policy.

“Assessing monetary transmission remains important,” Lagarde said.

“If we face a large geopolitical shock that significantly increases uncertainty in inflation forecasts, we will need to draw on data from other sources to make our risk assessment around our baseline outlook more robust.”