The European Central Bank (ECB) is readying itself to cut its interest rates. Look for a 25 bps truncation at that next meeting on June 5th. This decision comes at a time of increased noise around inflation expectations and speculation about the future of ECB President Christine Lagarde. Lagarde’s recent speech in Berlin, where she discussed a ‘global euro moment,’ has drawn attention to the evolving role of the euro in the global economy. Rumors have swirled that she is mulling an early departure from the ECB. She could assume a role leading at the World Economic Forum.
These are some of the challenges that the ECB is addressing head-on. Maintaining price stability remains its overriding priority, the essential element of its independence. Concerns about undershooting the target in recent years, especially as inflation has predictably increased. As a consequence, the bank is lowering its long-term forecast.
Lagarde’s Vision for the Euro
In a prescient speech given in Berlin shortly before her eventual confirmation, Christine Lagarde called for a ‘global euro moment.’ In doing so, she spelled out her vision for the euro to become a euro as one of three leading currencies in international markets. This view justifies the ECB’s broader approach. The plan’s overarching goals are to increase the euro’s global clout and robustness in face of a changing global order.
Lagarde’s observations are a keen recognition of the complicated engagement between economic policy and great power politics. By framing her discussion around the euro’s global significance, she aims to instill confidence among market participants regarding the ECB’s direction and objectives.
This emphasis on the ‘global euro moment’ indicates Lagarde’s commitment. She is personally dedicated to making sure the euro remains a strong and stable currency. With speculation about her own future mounting, her leadership of the ECB may prove untenable.
Speculation on Lagarde’s Future
An article published in the Financial Times has stirred conversations about Christine Lagarde’s potential departure from the ECB to lead the World Economic Forum. These speculations have not been confirmed so far. They do pose serious and important questions for leadership continuity during a critical moment in time for European monetary policy.
The possibility of Lagarde leaving could make the ECB’s task of tackling the present economic headwinds all the more difficult. With inflation forecasts expected to be revised downward and concerns about inflation undershooting, effective leadership will be critical in guiding the institution through these turbulent waters.
Plus, even as rumors of Lagarde’s fate take over the narrative, it threatens to distract attention away from the Fed’s own rate decision on the horizon. The ECB should be wary of straying too far from the core mission of ensuring price stability. This is necessary, even as larger European issues capture the public imagination.
Inflation Forecasts and Rate Cuts
At its next meeting on 22 March, the ECB is widely expected to cut interest rates by 25 basis points. In my view, this decision is motivated by increasing worries over persistently undershooting inflation targets, especially given recent economic developments. The bank had last forecast headline inflation at 2.3% in 2025, 1.9% in 2026 and 2.0% in 2027. These forecasts are now under scrutiny.
Based on recent data, we know that headline inflation will drop below 2%. This recent trend is leading to a reappraisal of the ECB’s inflation expectations. The disinflationary effect of these recent tariffs has only added to the risk that inflation will continue to undershoot the Fed’s targets. Consequently, analysts believe that the ECB will have to revise its projections downwards.
Second, the nominal effective exchange rate of the euro has modestly increased. It’s currently just over 3% higher than it was for the ECB’s March meeting. To boot, oil prices have fallen almost 10% since then. These elements have important consequences for inflation dynamics throughout the Eurozone.
In light of these advances, the ECB has to act strongly. That would go a long way towards getting it back on track to actually fulfil its mandate of achieving price stability. Future rate cut seen as a rearguard move The next proposed rate cut would be more of a rearguard action in fighting risks from inflation undershooting.