ECB President Christine Lagarde expressed increased optimism about controlling inflation and indicated that this will be a consideration in the central bank's October rate decision. Lagarde's remarks to the European Parliament suggested growing support among officials for a potential rate cut.
Lagarde noted that inflation might temporarily rise in the fourth quarter due to the cessation of previous energy price drops but assured that the latest developments strengthen confidence in inflation reaching target levels. This will be factored into the ECB's next monetary policy meeting.
German bonds saw reduced declines as Lagarde acknowledged economic challenges, with the 10-year bond yield stabilizing at 2.13% after an earlier peak of 2.18%. Traders have slightly increased their bets on a 25 basis point rate cut by the ECB in October, with the money market indicating an 85% likelihood.
Recent consumer price data showed a slowdown in inflation in Italy and Germany, following trends in Spain and France, reinforcing the view that the historic surge in inflation has been contained. Lagarde highlighted that inflation has been decelerating over the past two months.
Looking ahead, Lagarde indicated that some survey indicators suggest recovery resistance, but she expects recovery to strengthen over time as rising real incomes boost consumer spending.
After the ECB's rate cut in September, several Governing Council members expressed a preference to await more comprehensive economic data before making further decisions. The key question now is whether deteriorating growth prospects will compel ECB policymakers to advance monetary easing.
Remaining inflation concerns are mainly focused on service prices, driven by strong wage growth. However, Lagarde noted progress in this area as the labor market shows signs of softening. She observed a downward trend in core inflation and expects a gradual cooling in the service sector, contributing towards achieving lower inflation.
