Lagarde speech: Indicators suggest economic activity will remain modest
Christine Lagarde, President of the European Central Bank (ECB), explains the ECB's decision to leave key rates unchanged at the July policy meeting and responds to questions from the press.
Key takeaways
"Recent data points to some improvement in economic activitiy."
"Activity in services partly recovered."
"Digital services robust, partly on AI."
"Firms, households expect labour market to remain weaker than before conflict."
"Indicators suggest economic activity will remain modest."
"Energy shock feeding into higher prices."
"Firms expect to raise selling prices."
"Underlying inflation contained, full effect yet to play out."
"Survyes indicate moderate wage growth."
"Rising labour productivity helps contain unit labour cost growth."
"Most measures of longer-term inflation expectations stand at around 2%."
"Energy inflation likely to keep inflation well above target into first half of 2027."
"Inflation will then decline."
"Conflict a major source of uncertainty."
"Risks to growth tilted to downside."
"Higher energy prices will weigh on real incomes."
ECB flags persistent inflation risks despite modest recovery
The FXS Speechtracker score of 5.6/10, slightly above the historic 5.2/10 baseline, points to a mildly more impactful and cautiously hawkish tone. Lagarde acknowledges some improvement in economic activity and a partial recovery in services, with robust digital services partly driven by AI, but stresses that overall activity will remain modest and the labour market weaker than before the conflict, keeping growth risks tilted to the downside.
The hawkish tilt comes from repeated emphasis on the energy shock feeding into higher prices, firms planning to raise selling prices, and energy inflation likely to keep inflation well above target into the first half of 2027 before declining. While underlying inflation is described as contained and wage growth as moderate, rising labour productivity only partly offsets unit labour cost pressures, and longer-term inflation expectations around 2% suggest the Euro area remains anchored but vulnerable to prolonged energy-driven inflation, limiting scope for rapid policy easing.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
Author
Eren Sengezer
FXStreet
As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.
