European Central Bank’s Lagarde Signals June Rate Cut But Says Future Rate Path Uncertain (Macro News for March 23, 2024 – March 29, 2024)

Reid, Jenni
CNBC.com

Link to the article

Posted 3/20/2024

Keywords

interest rates, monetary policy, economic stimulus, inflation, ECB

Current News Topic

# 8 Monetary Policy

Article Synopsis

Christine Lagarde, head of the European Central Bank (ECB), stated that ECB policymakers are considering lowering interest rates in the June 2024 meeting. Lagarde also stated that forecasting bank actions beyond that date was impossible until they received additional data on inflation and union wage negotiations.

Lagarde noted that the labor market data was critical given that higher wages would eventually push inflation up. However, if the ECB’s expectations became reality, she indicated the bank would be able to begin “the dialing back phase of our policy cycle” and be less restrictive.

ECB officials expect services inflation to continue to push prices higher for the remainder of 2024. However, Lagarde adopted an optimistic tone given that overall Euro zone inflation fell to 2.6% in February, although services inflation remained elevated at 3.9%. The ECB has left interest rates unchanged since reaching a record high of 4% in September 2023.

Exercise 1 Questions

1. Fill in the blank: Monetary policy designed to slow economic growth is also called ________ monetary policy, or restrictive monetary policy.

2. Which of the following individuals is chair of the U.S. Federal Reserve as of April 2024?
a. Janet Yellen
b. Christine Lagarde
c. Jerome Powell
d. none of these

3. Graphically show the impact on interest rates of an increase in the money supply.

Exercise 2 Discussion Questions

1. Why is the ECB considering reducing interest rates?
NOTE TO INSTRUCTOR: Look up the ECB’s interest rate trend over the past 10 years and discuss it in class.

2. Why is the ECB unwilling to make interest rate projections beyond June 2024?
NOTE TO INSTRUCTOR: Debate this issue in class. Should the ECB focus on fighting inflation or stimulating economic growth?

3. What did Lagarde mean by stating the ECB might begin the “dialing back phase of our policy cycle” to be less restrictive?
NOTE TO INSTRUCTOR: Discuss how lags affect monetary policy.