ECB President Lagarde Defies Powell's Dovish Stance: 'We Should Absolutely Not Lower Our Guard'

Investors hoping for European Central Bank (ECB) President Christine Lagarde to signal a path towards interest rate cuts in 2024, in line with Federal Reserve Chair Jerome Powell‘s previous day remarks, found themselves recalibrating these expectations following her hawkish press conference on Thursday.

At its final meeting of the year, the ECB opted to keep its key interest rates unchanged, marking the second straight hold and likely signaling that the end of the tightening cycle began in July 2022. However, the similarities with the Fed’s meeting ended there.

While Powell subtly opened the door to future rate reductions, Lagarde’s narrative was decidedly different.

Read also: Fed’s Unexpected Dovish Signals Spark Market Euphoria: Economists Weigh In

Lagarde Doesn’t Lower The Guard

“We should absolutely not lower our guard,” Lagarde asserted, countering the anticipations of market participants who were speculating on potential ECB rate cuts mirroring the Fed’s direction.

She clarified that the ECB’s policy-making process did not entertain discussions on rate cuts and is not uninfluenced by market speculations or temporal pressures.

Lagarde stressed that the ECB will continue to be guided by a data-dependent approach in determining the appropriate level and duration of restrictions.

She stated that if the key ECB interest rates remain at their current levels for an extended period, they would “make a substantial contribution to the return of 2% inflation.”

“There’s a whole beach in between a hike and a cut” and that is a hold, Lagarde said.

In conjunction with the decision to hold rates steady and provide a firm stance against future rate cuts, the ECB has also declared its intention to initiate active sales of securities acquired under the Pandemic Emergency Purchase Programme, proceeding at a pace of €7.5 billion monthly.

The ECB also unveiled its macroeconomic projections for the upcoming years. Headline inflation has been downwardly revised from prior estimates, with Frankfurt now expecting it to average 5.4% in 2023, 2.7% in 2024, 2.1% in 2025 and 1.9% in 2026.

Economic growth is expected to show a modest uptick from 0.6% in 2023 to 0.8% in 2024, leading up to 1.5% for 2025 and beyond.

Euro Strengthens, European Stocks Pause

After Lagarde’s remarks, the euro-dollar exchange rate, as tracked by the Invesco CurrencyShares Euro Currency Trust ETF FXE, rose to 101.52, up 1%.

On the contrary, European equities flipped to the downside, likely impacted by the disappointing remarks regarding potential rate cuts.

Currency-unhedged exchange-traded funds (ETFs) tracking European stocks such as the SPDR DJ Euro Stoxx 50 ETF FEZ, the Global X DAX Germany ETF DAX, the iShares MSCI Italy ETF EWI, and the MSCI France Index Fund EWQ, still managed to hold on minor gains for the sessions, aided by the strength of the euro.

Now read: With Fed Rate Cuts On The Horizon, Equity Markets Soar, Dollar Weakens, 10-Year Treasury Yield Falls Below 4%

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