Lagarde: We Should Not Lower Our Guard, Eyeing Domestic Inflation

The Q&A begins - the first question: What does the ECB think about rate cuts next week. Is the earlier fading of PEPP reinvestments a prerequisite for rate cuts and are these likely in March?

• A: We are data dependent, not time dependent. We have three criteria (Inflation outlook, underlying inflation, transmission of monetary policy) that we use to determine whether enough progress has been made and whether our monetary policy has been working. When we look at our inflation outlook, we see inflation at 2.1% in 2025 and the path to get there is flatter than before, which lowers the risk of inflation expectations de-anchoring. We see a strong transmission to financing the volumes of loans to households and corporates.
• We should not lower our guard for two reasons. First, our inflation outlook is conditioned on the interest rate path that was embedded in market data at the time of the cut off date (November 23). Second, when we look at all measures of underlying inflation, there is one particular measurement that is hardly moving – domestic inflation. This is predicated largely by wages.
• We need more data and need to understand why domestic inflation resisting. To understand that we need a category of things. First, we need wage data, which will be measured in multiple ways (job offer, wage trackers etc). When we look at the data we now, it is not declining. Second, we need more information about profit units because our projection is predicated on the catch up wage growth.