Lagarde freely admitted that the Bank hadn’t been able to factor all these in to its latest forecasts, which revised their estimate for growth this year slightly lower and inflation slightly higher. However, with its sixth interest rate cut since June, the ECB said its policy is now “becoming meaningfully less restrictive.”
Paying for security
Lagarde tried hard not to be dragged into a debate over how Europe will pay for its grand plans to defend itself in future. She acknowledged that the large increase in spending would support growth in the short term and maybe beyond, but she was clear that the ECB would not participate in any financing efforts.
“This is not the purpose of the ECB,” she said. “Our mandate is price stability.“
On Tuesday, European Commission President Ursula von der Leyen announced plans to loosen the EU’s fiscal rules and launch more joint borrowing that could mobilize around €800 billion for rearmament. A day later, Germany’s chancellor-in-waiting, Friedrich Merz, struck a deal with his prospective coalition partners to loosen the country’s Debt Brake with a permanent carve-out for most defense outlays, as well as creating a €500 billion special fund for infrastructure. Germany’s borrowing costs posted their biggest one-day rise since reunification in 1990 on Wednesday in response, dragging those of other European governments higher in their wake.
Investors are assuming that the coming boost to public spending will not only support growth but also lead to the ECB cutting rates by less than they previously thought. Financial markets now fully price in only two more rate cuts by December — from three at the start of last week.
In the near term, analysts said, the ECB is still more likely to respond to economic weakness.
