Not overly concerned by the export of inflation to Europe

The European Central Bank is “not overly concerned” about the risk of inflation from abroad and will continue to cut interest rates at a gradual pace, the institution’s President Christine Lagarde told CNBC Wednesday.

Asked about the potential effect on Europe if inflation resurges in the U.S., Lagarde said: “If there is reigniting of inflation in the United States it will be an issue for the United States for sure, that is where the first and prime consequences will be.”

“We are not overly concerned by the export of inflation to Europe,” she told CNBC’s Karen Tso.

“There will be interesting phenomenon that we will watch. The exchange rate, for instance, will be of interest, and … may have consequences, but we are certainly interested to see the U.S. grow, because growth in the U.S. has always been a favorable factor for the rest of the world,” she added.

The ECB chief stressed that policymakers were confident inflation would come to the central bank’s 2% target over the course of 2025, and that the disinflation process would continue. Annual inflation in the euro area came in at 2.4% in December, posting a third straight monthly increase after hitting a low of 1.7% in September.

Lagarde also said that “markets anticipate vastly different monetary policy moves in the next few months” from the U.S. and the euro zone, as the ECB and Federal Reserve “did not reduce rates at the same pace.”

She noted: “We do have that divergence, that has to do with a different economic setting at the moment between the U.S. and Europe.”

The ECB cut interest rates four times last year, reducing the deposit facility — its key rate — to 3%. Markets are now pricing in further reductions to 2% by September 2025. That compares with less than a half-percentage point rate trim priced in for the Federal Reserve over the same period.

On the path of rates, Lagarde said: “The direction is very clear. The pace we shall see depends on data. But, you know, [a] gradual move is certainly something that comes to mind at the moment.”

“We are on this regular, gradual path. Disinflation is coming through,” she added.

In their most recent set of macroeconomic projections in December, ECB staff said they expect annual inflation in the euro area to average 2.1% this year, adding that progress on disinflation was “well on track.”

It comes as the bloc grapples with lackluster growth, with its biggest economy Germany recording its
second straight annual GDP contraction in 2024.

Lagarde, however, described risks to growth as “to the downside.”

The central bank will be closely monitoring services, energy, wages and so-called “late-comer” factors such as insurance to see whether early 2025 delivers the gradual reduction in service prices it expects, she said.

The central bank head also described the much-debated “neutral rate” — the point at which monetary policy is neither stimulating nor restricting the economy — as between 1.75% and 2.25%. In December, she suggested this range was between 1.75% and 2.5%.

While headline euro zone price growth has tumbled from a peak of 10.6%, services inflation has been particularly sticky, hovering close to the 4% mark since November 2023.