European Central Bank (ECB) President Christine Lagarde indicated that the bank's upcoming forecast report next week is likely to present a more optimistic assessment of economic growth prospects. In a recent speech, Lagarde highlighted the unexpected resilience of the 20-nation Eurozone in the face of U.S. tariff pressures. She emphasized that the EU has not retaliated with countermeasures, while the euro exchange rate remains stable and the labor market continues to show strength.
Lagarde stated on Wednesday, "In our latest economic projections, we have already raised growth expectations. I anticipate that December’s forecast may see another upward revision." Following her remarks, Eurozone bond prices declined, with France’s 10-year government bond yield briefly surpassing 3.60%, hitting a nine-month high before quickly retreating. Money markets have now priced in a 40% probability of a 25-basis-point ECB rate hike next year, up from 30% on Tuesday.
The Eurozone's economic resilience has reinforced policymakers' confidence that benchmark interest rates can remain at current levels for the foreseeable future. Third-quarter GDP growth in the region expanded by 0.3% quarter-on-quarter, exceeding preliminary estimates. Lithuanian Central Bank Governor Gediminas Simkus remarked on Wednesday that he sees no immediate need for further rate cuts, signaling a shift in stance as policymakers grow more convinced that inflation will not significantly undershoot the ECB’s target range.
ECB Executive Board member Isabel Schnabel also expressed support for market expectations of a future rate hike. These statements have effectively dispelled investor bets on ECB rate cuts next year. The sentiment has reverberated globally, with bond yields climbing to levels not seen since 2009 as markets anticipate the end of easing cycles from the U.S. to Australia.
Lagarde noted, "With inflation stabilizing around 2% and medium-term projections aligned with this target, I reiterate that we are in an ideal policy range." She added that the Eurozone economy is "very close to its potential growth level."
Responding to French President Emmanuel Macron’s proposal for the ECB to broaden its mandate beyond inflation to include growth and employment, Lagarde acknowledged the discussion as worthwhile but emphasized that the current framework already allows sufficient flexibility to consider factors like employment, innovation, productivity, and climate change. "Our mandate is clear: to maintain monetary stability in the region," she affirmed.
Additionally, Lagarde praised the EU’s latest proposal to use frozen Russian assets to support Ukraine’s defense, calling it "the most legally sound approach I’ve seen under international law." She stressed that investors would recognize this as an exceptional case rather than arbitrary seizure of sovereign assets.
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