Lagarde indicates ECB rates have peaked

Glass half full or half empty? The latest statement by European Central Bank president Christine Lagarde that the ECB would not be cutting interest rates for at least the next couple of quarters suggests that it would be the second half of next year before such a move was contemplated. This appears designed as a message to the financial markets, which had priced in a 75 per cent probability of a cut by next April, up from a 30 per cent probability last October.

However her comments are also symptomatic of how the debate has changed. It does now seem highly likely that the period of increasing interest rates is over, as evidence appears of a slowdown in the euro zone economy and falling inflation. Lagarde warned in an interview with the Financial Times that a spike in energy prices, due to events in the Middle East, could still send inflation higher. Interest rates had to stay high for long enough to make sure inflation was under control, she said. And a worry for central bankers is that inflation has become embedded and will remain stuck above target levels.

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All that said, interest rate cuts are on the cards for next year and it is now a question of when and how much, rather than if. Tracker mortgage holders will be closely watching the debate. So will those due to roll off fixed rates and having to refinance, of which there are an estimated 65,000 this year and 70,000 next year. The new fixed rates they are offered – or the variable rate options – will depend as much on market expectations as official rates. That said, the quicker interest rates fall, the lower the risk of significant numbers of new problem loans emerging.

The ECB is in a tricky position. Having been late to the party in increasing interest rates, it now faces the risk that it may have gone too far and that this is threatening a euro zone recession or problems for highly indebted countries. It will keep talking tough for a few months yet, but sooner or later in 2024, interest rates do look set to fall.