ECB's Lagarde Declares Victory Over Inflation's "Darkest Days"

European Central Bank President Christine Lagarde has declared that the worst of the Eurozone's inflation battle is behind it, signaling a shift in the central bank's stance, reports the Financial Times.

"The darkest days of winter look to be behind us," Lagarde stated in Vilnius on Monday, adding that further interest rate cuts are likely. "The direction of travel is clear and we expect to lower interest rates further."

Lagarde's remarks, echoing the ECB's recent pivot towards a more dovish tone, are likely to solidify market expectations of further rate cuts in the coming months. Investors have already been pricing in a series of consecutive rate reductions throughout the first half of 2025, based on indications of sluggish growth and easing price pressures.

The ECB last week cut borrowing costs for the fourth time this year, lowering the benchmark deposit rate by a quarter-point to 3 percent. The central bank also tempered its previously hawkish language, signaling a greater confidence in the inflation outlook.

Lagarde asserted that the persistent risk of high underlying inflation derailing the return to price stability has "recently" subsided.

The ECB began raising rates in 2022 in response to a surge in prices driven by post-pandemic demand, global supply chain bottlenecks, and rising energy costs following Russia's invasion of Ukraine. Inflation reached a record high of 10.6 percent in late 2022, exceeding the ECB's 2 percent target by more than fivefold.

However, annual inflation has declined sharply this year, reaching 2.3 percent in November. The ECB's latest projections, released last week, anticipate inflation falling to 2.1 percent next year and 1.9 percent in 2026.

"There is now greater alignment between our forecasts and underlying inflation," Lagarde stated on Monday, adding that the ECB is "close to achieving our [2 percent] target."

Despite this progress, Lagarde identified Eurozone's weaker-than-expected economic recovery as a key "downside risk" to the inflation outlook, emphasizing that "small sequential downward revisions to the growth outlook" since 2023 have cumulatively resulted in a significant overall downgrade.

The ECB's primary remaining concern is high wage growth, but Lagarde expects this to moderate from 4.8 percent this year to 3 percent in 2025, a level generally considered consistent with the central bank's target.

Lagarde highlighted geopolitical uncertainties as a potential factor influencing investor sentiment and borrowing behavior. The ECB is particularly focused on the risk of uncontrolled widening of bond spreads between Eurozone member states, which could hinder the effectiveness of monetary policy.

"Assessing monetary transmission will continue to be important," Lagarde emphasized. "If we face large geopolitical shocks that significantly increase uncertainty about the inflation projections, we will need to draw on other sources of data to make the risk assessment surrounding our baseline outlook more robust."