ECB President Christine Lagarde was under the weather at today’s press briefing and led to some less-than-sharp messaging but — between the lines — she was clear on what had changed.
“We are at the medium-term target that we set for ourselves of reaching the 2% at the end of our projection,” she said, highlighting that forecasts now see 1.9% in 2026. In addition, she said those forecasts are “probably a bit severe with ourselves” as she noted the projections were made with a cutoff of November 23, which was before a string of soft CPI readings. She said they “are going to look very carefully at the end of 2025” forecast for inflation, which is at 2.1% right now.
There’s a good chance that will be knocked down below 2%, which will give the ECB ammunition to cut sooner rather than later.
Lagarde was also asked pointedly about previous comments about not hiking in the first two quarters of 2024 and she declined to repeat that, emphasizing data dependence instead.
That has the market thinking the March 7 meeting is 50/50 for the first cut with 41 bps priced in by April. Looking to year-end, the market implies a rate of 2.40%, which is 148 bps below the current main refi rate of 4.50%.
The euro has just nudged above 1.10 for the first time since late-November and eyes are on the November high of 1.1017 but nearly all the strength in the pair is due to broad USD selling as the market prices in an even-more aggressive Fed cutting 155 bps next year.